Tight Liquidity Forces Indian NBFCs to Look Overseas for Funding Solutions
Introduction
Estabizz Fintech Pvt Ltd highlights a critical shift in the funding strategies of Indian Non-Banking Financial Companies (NBFCs) due to continued tight liquidity conditions within the country. As local avenues become increasingly challenging, these financial entities are turning their sights towards the global markets to raise the necessary capital. This move not only addresses the immediate need for liquidity but also aligns with regulatory advisories promoting a diversified funding profile.
Offshore Bonds: A New Dawn for NBFCs
Since the onset of 2024, several leading NBFCs including REC, Bajaj Finance, and L&T Finance have ventured into overseas markets, raising funds through multiple tranches. This trend is expected to gain momentum with entities like Manappuram Finance and Tata Motors Finance seeking to secure external commercial borrowings (ECB) in the near future. The pivot to global financial markets is a strategic response to the increased borrowing costs back home, precipitated by the Reserve Bank of India (RBI)’s decision to hike risk weights for bank loans to NBFCs in November 2023.
The Impact of Raised Risk Weights
The RBI’s modification of risk weights has inadvertently steered NBFCs towards exploring international bonds. Domestic borrowing costs have surged, leading to a cascade effect that includes a crowded domestic bond market, underscored by a robust demand for credit and heightened fund requirements from lenders. These developments encourage NBFCs to embrace offshore investments, accepting the higher costs as a necessary expenditure for diversification and continued operational growth.
Diversification through Offshore Funding
NBFCs are actively diversifying their funding sources to mitigate the challenges posed by domestic market constraints. The complications triggered by repeated borrowing in the local bond market, coupled with limitations from investors, are driving Indian NBFCs to look beyond borders. Noteworthy is the approach of companies like Piramal Capital & Housing, which plans to elevate its overseas borrowing to constitute 10-15% of its total liabilities within the next 2-2.5 years.
Strategic Shifts in Funding
The current scenario, complicated by unanticipated developments such as the US Fed rate cuts not aligning with expectations, has rendered domestic borrowing exorbitantly expensive. In contrast, global banks are now offering competitive pricing for hedging costs, rendering overseas ventures even more appealing.
Regulatory Influence and Market Dynamics
The RBI’s advisories, warning against a concentration in funding profiles, serve as a catalyst for NBFCs to seek alternative funding pathways. This strategic diversification not only aids in regulatory compliance but also ensures a more stable funding mechanism capable of weathering financial turbulences.
Prospects and Challenges Ahead
Estimations by ICRA suggest a likely moderation in credit or loan growth for NBFCs, poised at 13-15% in FY25, dipping from 18% in FY24. The anticipated need for incremental debt funding stands at approximately ₹5.6-6 trillion for FY25. This fiscal forecast underscores the imperative for NBFS to broaden their funding horizons to sustain growth and operational continuity.
Continued Analysis and Industry Insights
Incremental Shifts in Funding Models
The shift in funding models is underscored by significant figures. For instance, direct bank credit to NBFCs saw a stark reduction in Q1 FY25, plummeting to ₹7,500 crore from ₹92,000 crore in Q1 FY24. This reduction in domestic support propels NBFCs towards international markets, indicating a strategic shift that might redefine their funding structures in the long term. Moreover, the weighted average cost of funds for these institutions is expected to rise by 20-40 basis points over FY24, emphasizing the growing financial pressures and the urgent need for diverse funding routes.
Response to Global Economic Influences
The global financial landscape also plays a crucial role in shaping the strategies of Indian NBFCs. The historical low in Indian corporates’ fundraising through dollar bonds in 2023 due to high global yields illustrates the external economic factors influencing funding decisions. With such international economic currents, NBFCs must navigate carefully, balancing between cost-effective funding and the implications of global economic shifts.
Future Prospects and Strategic Moves
As NBFCs adjust to these evolved funding paradigms, the focus is increasingly on maintaining a balanced and diversified portfolio that can withstand both domestic and international pressures. The strategic move towards increasing overseas borrowing is not just a temporary shift but a long-term adjustment to their overall funding strategy. For instance, Shriram Finance and other major players continue to pursue aggressive overseas funding plans, aiming to secure a steadfast supply of capital through FY25 and beyond.
Innovation and Adaptability
The need for innovation in funding strategies cannot be understated. As NBFCs explore new avenues like offshore bonds and external commercial borrowings, adaptability becomes key. The ability to swiftly adapt to regulatory changes, market fluctuations, and economic downturns will define the success of these financial entities.
Estabizz Fintech Pvt Ltd’s Commitment
At Estabizz Fintech Pvt Ltd, we are committed to closely monitoring these developments and providing our clients and stakeholders with timely and actionable insights. Understanding the intricacies of these shifts helps us guide our strategies and offerings to better serve the evolving needs of the financial sector.
Conclusion
The journey of Indian NBFCs in these challenging financial times highlights their resilience and strategic foresight. As they continue to navigate the complexities of domestic and international funding environments, their success will hinge on their ability to innovate and adapt. Estabizz Fintech Pvt Ltd remains dedicated to supporting these financial institutions through expert analyses and strategic guidance, ensuring they are well-equipped to meet their funding needs and growth aspirations in an increasingly interconnected global economy.
In facing the prevailing liquidity crunch, Indian NBFCs are adopting a proactive stance by venturing into international markets. This strategic pivot not only addresses immediate liquidity concerns but also sets the stage for a more resilient funding model. Estabizz Fintech Pvt Ltd remains vigilant of these market dynamics, understanding that the ability to navigate these complex environments is crucial for sustained growth and stability in the finance sector.
Estabizz Fintech compiled the material in this article using the most recent Acts, Rules, Circulars, Notifications, Provisions, Press Releases, and material applicable at the time. They ensured the completeness and correctness of the material through due diligence. When using this material, users must consult the relevant, applicable legislation. The given data may change without prior notice and does not constitute professional advice. Estabizz Fintech disclaims all liability for any results from the use of this material.
