NBFC Loan Growth Slows to 6.5% in H1FY25 Amid RBI's Regulatory Changes

The loan growth of Non-Banking Financial Companies (NBFCs) slowed down during the first half of the fiscal year 2025 to 6.5 per cent on a half–year–on–half–year (H-O-H) basis in September 2024, revealed in the Financial Stability Report (FSR) by the Reserve Bank of India (RBI). This is followed by the central bank's increasing risk weights on NBFCs lending to certain consumer credit categories and on bank lending to NBFCs.

The central bank noted that the credit slowdown was most pronounced in the upper-layer NBFC segment, dominated by NBFC investment credit companies, where retail lending constitutes 63.8 per cent of their loan book. In contrast, middle-layer NBFCs, excluding government-owned entities, demonstrated strong loan growth, particularly in their retail loan portfolios.

The credit growth of the sector also slumped to 16 per cent year-on-year basis against 22.1 per cent last year.

Meanwhile, credit growth of the sector slumped to 16 per cent from 22.1 per cent on a year–on–year (YoY) basis.

As per the RBI, there is also a shift in funding patterns as NBFCs are turning to the bond market amidst a slowdown in direct bank funding. Data from September 2024 highlighted that bank funding for upper-layer NBFCs, encompassing direct borrowing, commercial papers, and debentures, fell to 34.6 per cent from 35.8 per cent. Similarly, for middle-layer NBFCs, bank funding declined to 26.3 per cent from 26.7 per cent.

“The growth of bank borrowings in NBFCs’ liabilities also declined from 26 per cent to 17 per cent; reliance on non-bank sources raised their cost of funds”, the report stated.

NBFCs continued to dominate the corporate bond market, emerging as the largest issuers with private placement being the preferred mode for bonds listed on recognised exchanges.

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NBFCs further sought to diversify their funding avenues by increasing the issuance of listed non-convertible debentures (NCDs), reflecting a strategic pivot to maintain liquidity and meet their capital needs. This was in response to the moderation in direct bank funding.

Diversification of Funding Sources

Earlier, RBI suggested that shadow banks need to diversify their sources of funding as a risk mitigation strategy due to their dependence on banks despite some moderation in recent times.

This dependence came into the scenario following the Infrastructure Leasing & Financial Services (IL&FS) crisis, which posed liquidity challenges for the NBFC sector. This led to a loss of market confidence and rating downgrades, which significantly reduced NBFCs' borrowing capabilities and pushed them to depend more heavily on bank funding. This situation was further exacerbated during the pandemic.

The RBI, in November 2023, raised the risk weight for banks funding NBFCs from 100 percent to 125 percent. The central bank cited the high growth in consumer credit and increasing dependency of NBFCs on bank borrowings as the reason behind the decision.

This regulatory move has contributed to a moderation in NBFCs' reliance on bank funding, encouraging the sector to explore alternative capital-raising avenues.