Why is the RBI cautioning non-bank lenders?
Reserve Bank of India and Finance Minister advise caution to non-bank lenders
In a recent statement, RBI Governor Shaktikanta Das emphasized the need for non-bank financial companies (NBFCs) to broaden their funding sources and reduce reliance on bank loans. This cautionary advice was echoed by Finance Minister Nirmala Sitharaman, urging NBFCs and small finance banks to be cautious in their lending practices. This article explores the reasons behind the regulator and the minister’s concerns for NBFCs.
Borrowing sources of NBFCs
Non-bank lenders primarily rely on bank credit as their main borrowing source. As of March 31, 2023, bank credit accounted for 41.2% of total borrowings, slightly lower than the 41.4% recorded on December 31, 2022, but higher than the 39.6% recorded on March 31, 2022. Market borrowings constitute the second largest source, representing 38.8% of total borrowings in March 2023, down from 41% in March 2022. Bank loans to NBFCs have shown steady growth, with a compound annual growth rate (CAGR) of 18% over the past five years, reaching ₹12.3 trillion in September, according to Crisil Ratings.
Asset quality of NBFCs
NBFCs have experienced improved asset quality and capital ratios in the second half of FY23. RBI data reveals that the capital adequacy ratio of the sector rose by 150 basis points to 27.5% between September 2022 and March 2023. The gross non-performing asset (NPA) ratio of NBFCs also decreased by 160 basis points to 3.8% during the same period. Furthermore, the RBI’s Financial Stability Report indicates a decline of 470 basis points in special-mention accounts, which are loans with delayed repayments that have not yet turned sour.
Concerns of the RBI
The RBI is cautioning NBFCs and aiming to reduce their dependence on bank loans to prevent contagion in an increasingly interconnected financial system. Das stated that NBFCs are significant net borrowers within the financial system and have a substantial exposure to banks. Additionally, banks invest in bonds issued by NBFCs. A recent report by the Centre for Advanced Financial Research and Learning (CAFRAL), an economic research institution promoted by the RBI, emphasizes the need for close monitoring of NBFCs due to their increased integration with the banking sector since the pandemic. The report also highlights the potential risks posed by the proliferation of NBFC credit, particularly if they become more systemically important.
Growth pace of NBFCs’ loan books
Gross loans in the NBFC sector grew by 16.1% in FY23, surpassing the previous fiscal year, mirroring the growth in bank loans, according to RBI data. The surge in personal loans has been a major contributing factor, prompting the RBI to raise capital requirements for this segment. Personal loans from NBFCs increased by 31.3% in FY23. Though changes in risk weights for consumer loans and bank credit to NBFCs could moderately dampen demand, they are not expected to significantly impede growth. Crisil Ratings forecasts that NBFCs will witness asset under management growth of 16-18% in FY24 and 14-17% in FY25.
However, recent RBI regulations may hinder NBFCs from fully capitalizing on certain growth areas. Rating agency ICRA suggests that the increase in capital requirements for personal loans from NBFCs could impact loan sell-downs or direct assignments to purchasing banks, at least in the short term. Furthermore, the growing financing needs of NBFCs to meet the demand for consumer and personal loans, coupled with banks’ increasing interest in personal loan products, have fueled these sales.
In conclusion, the RBI and the Finance Minister’s cautionary stance towards NBFCs reflects their efforts to mitigate risks and maintain stability in the financial sector. By diversifying funding sources and reducing reliance on bank loans, NBFCs can enhance their resilience and contribute to a more robust and sustainable financial ecosystem.
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