NBFCs should diversify funding sources in 2024

It has come to the fore, that borrowings by NBFCs from commercial banks is on an increase and Reserve Bank of India, the apex Regulator has noted the same with concern.

• • RBI has hence advised the NBFCs to diversify their funding sources in the coming year ie. 2024, due to the rising competition in the banking sectors and higher risk weights on loans to these lenders.
  • On the contrary it is also seen that there is sufficient increase in the issuances of commercial papers, a short term debt instrument and bonds which have gained appreciable pace.
  • It was in November this year that RBI had increased the risk weights on bank loans to non-banking financial companies (NBFCs) and also on unsecured loans disbursed by NBFCs to their borrowers by 25% points each.
  • This move was made with an intention that it would make loans more expensive as it requires them to set aside more capital as a safety measure, likely prompting them to pass on the increase in credit cost to customers.
  • Precisely, it is well known that increased competitive pressures, margin compression on account of funding cost increases and asset quality performance would be the key trend to monitor in the coming year. Also the entities (institutions) would be diversifying their funding profiles in the coming days, which will be the key differentiator.
  • Also, the speedy expansion of credit and more so in the unsecured consumption and digital lending in the recent past has made RBI to initiate series of precautionary measures. Thus, the year 2023 was seen as an year of precautionary measures.
  • Under RBI’s scale based regulations, NBFCs are divided into four layers according to their size, activity and perceived risks. The lowest or the base layer is followed by middle, upper and top layers.
  • The regulator in September this year released a list of 15 NBFCs which included Tata Sons, Shriram Finance and LIC Housing Finance that are part of Upper Layer.
  • Few of the Non-bank lenders feel that RBI is reviewing the Risk Weightage guidelines and thus, differentiates between NBFCs which lend for consumption and that lends for production sectors of economy.
  • This is expected to improve the funding access to productive sectors. The only factor to be noted here is that this could lead to customers paying more and make NBFC loans less affordable.
  • We should wait and see the RBI’s further moves in the days to come.