NBFCs Diversify Funding Sources As Bank Loans Become Scarce

Non-banking financial companies (NBFCs) are increasingly turning to alternative funding sources such as non-convertible debentures (NCDs), commercial papers (CPs), foreign currency borrowings (FCBs), and securitisation to sustain their growth amid challenges in securing bank loans.

A Crisil Ratings study of over 110 NBFCs, accounting for over 95 per cent of the sector’s assets under management (AUM), indicates that the share of bank loans in the sector’s borrowings declined by around 60 basis points (bps) to 47.0 per cent in the quarter ending June 30, 2024.

The shift comes after the risk weights on bank lending to higher-rated NBFCs were raised last year, making it more challenging for NBFCs to access bank loans as freely as before. According to the report, the decline in bank loans was more pronounced among NBFCs rated ‘A and below’ compared to those in the ‘AAA’ and ‘AA’ categories.

Malvika Bhotika, Director, Crisil Ratings commented, "While banks will remain the dominant funding source for NBFCs, the bond market will gain market share over the near to medium term. The share of NCDs in the sector’s borrowings rose by around 30 bps to 28.5 per cent in the June quarter, particularly for entities rated ‘AAA’ and ‘AA.’ Meanwhile, those rated in the ‘A and below’ categories are also attempting to tap the market, but on a smaller scale."

The report also highlighted that issuances by NBFCs are expected to be supported by improved investor confidence, driven by stronger balance sheets and healthy liquidity. Many NBFCs have maintained a liquidity coverage ratio much higher than the regulatory requirement, further boosting investor trust.

Over the near to medium term, diversifying funding sources will remain crucial for NBFCs to maintain their growth trajectory and optimise borrowing costs. With bank funding becoming more expensive by 20-50 bps over the past few quarters, NBFCs are increasingly tapping other funding avenues such as CPs, FCBs, and securitisation, which together accounted for 16.1 per cent of the sector’s borrowings as of June 2024.

Securitisation And CP Issuances On The Rise
Securitisation has become one of the preferred routes for NBFCs to raise funds. The volume of securitisation reached Rs 1.9 lakh crore in fiscal 2024, a level last seen four years ago. Similarly, the momentum in CP issuances has picked up in recent quarters, with overall volume reaching levels seen almost five years back. Mutual funds, one of the largest investors in such CPs, recorded outstanding investments at a six-year high in July 2024.

Rounak Agarwal, Associate Director, Crisil Ratings noted, "Securitisation will continue to be one of the preferred alternative routes for NBFCs to raise funds. Interestingly, NBFC issuers in the ‘A and below’ rating categories have been able to offset the decline in their share of bank borrowings through securitisation, with the share rising by around 30 bps in the June quarter."

On the other hand, issuers rated ‘AAA’ and ‘AA’ have relied more on FCBs, with their share of FCBs in overall borrowings rising by around 50 bps to 5.3 per cent, thanks to lower hedging costs.

As NBFCs continue to diversify their funding mix, any regulatory changes that impact their ability to raise resources will be closely monitored, as these could significantly affect the sector's growth trajectory.