Loan growth rate of non-banking financial companies (NBFCs) slowed to 6.5 per cent in the first half of this fiscal year, according to the Reserve Bank of India’s latest Financial Stability Report.
The main reason for the relaxation is the increased risk weight of NBFC loans to certain consumer credit categories and bank loans to NBFCs.
In November 2023, RBI increased the risk weight for lending to NBFCs by 25 basis points. The risk weight for personal loans has increased from 100% to 125%. This applied to all retail loans except home loans, education loans, car loans and microfinance/self-help group loans.
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At the same time, the risk weight of bank loans of AAA, AA and A rated NBFCs has increased. For example, the risk weight for AAA rated NBFCs has increased from 20% to 45%.
The increase in risk weight metrics has had a direct impact on lending for upper tier NBFCs, the report said. Around 63.8% of the loan portfolio of top tier NBFCs is in retail lending, which has a large impact. Meanwhile, mid-tier NBFCs, excluding government-owned NBFCs, maintained strong loan growth, especially in their retail loan portfolio, the report highlighted.
At the same time, bank borrowing growth in NBFC debt declined from 26% to 17% YoY. As a result, NBFCs have become more dependent on non-bank funding sources, increasing their funding costs. To diversify their funding sources, NBFCs are increasing their offshore borrowings to contain overall costs. However, these NBFCs are not hedged and this may result in currency risk.
Overall, the NBFC sector remains healthy and has significant capital buffers with a capital-to-risk-weighted capital ratio (CRAR) of 26.1% as of September 2024. Interest margin and revenue showed solid growth, with net interest margin of 5.1% and return on assets of 2.9%. . Another key feature that highlights the healthy growth of the NBFC sector is the improvement in asset quality.
The industry’s gross non-performing assets (GNPA) represent 3.4% of total loans and advances. However, write-downs have shown an increasing trend, with some outlier NBFCs witnessing significant increase in write-downs, the report said.
“While risks from global spillovers remain, India’s financial system is expected to remain healthy and vibrant, supported by further improvements in bank and NBFC balance sheets and strong buffers,” the central bank said. Governor Sanjay Malhotra said this in the report summary and outlook. Report.
