MUMBAI: Bank lending to non-banking financial companies (NBFCs) grew at its slowest pace in four years, rising 6.7% in 2024 to Rs 16.22 lakh crore as of December, compared with a 15% growth in 2023.
The sharp slowdown was driven by higher funding costs after the Reserve Bank of India (RBI) raised risk weights on such loans. In absolute terms, banks’ lending to NBFCs fell to Rs 1 lakh crore in 2024, compared to nearly Rs 2 lakh crore in the previous year, according to RBI data.
“The slowdown in bank credit to NBFCs mirrors the decline in unsecured loans. The RBI’s move to raise risk weights has effectively curbed the growth of credit to both NBFCs and unsecured loans,” said the head of credit at a public sector bank.
Concerned over increased dependency of NBFCs on bank borrowings, the RBI in November 2023 increased the risk weight for bank credit to NBFCs by 25 basis points to 125%. The move has made it more expensive for banks to lend to NBFCs, as they are required to set aside more capital for such loans. This prompted banks to become more selective in lending, leading to NBFCs exploring alternative funding avenues.
“NBFCs are actively seeking to diversify funding sources, as the RBI has expressed concerns about over-reliance on banks. We are also focusing on boosting the proportion of ECBs in our overall borrowing strategy,” said the CFO of an NBFC. “This shift in funding strategy is not only a response to regulatory changes, but also a move towards greater financial stability for NBFCs.”
By diversifying funding sources, NBFCs can reduce their dependence on any single source and mitigate potential risks associated with fluctuations in bank lending, he added.
NBFCs have increasingly turned to the domestic capital market, raising funds through bonds, as well as the overseas market, tapping into dollar bonds and syndicated loans.
Fundraising by NBFCs through the external commercial borrowings (ECB) route hit a five-year high in 2024. Data from PRIME Database reveal that NBFCs raised Rs 3.64 lakh crore through ECBs in 2024, the highest amount in five years.
Shriram Finance, the flagship company of the Shriram Group, raised $1.277 billion in multiple currencies through an ECB transaction. Muthoot Finance raised $400 million through the ECB route by issuing secured notes under its global medium-term note programme of $2 billion.
Though ECBs are becoming a sought-after channel to raise funds from overseas, this route has limitations in terms of amount. A corporation can raise a maximum of $750 million during a fiscal under the automatic route.
Source: The Financial Express
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