Non-banking Finance Companies (NBFCs) will soon explore overseas market for fund raising with RBI restricting banks investment in them as a pre-caution on the back of run-away credit off-take.

In fact, some of the top-rated NBFCs have already starting tapping into the ECB market. Among them, Cholamandalam Investment & Finance raised the highest amount $200 million, followed by REC and Bajaj Finance fund raise of $147.9 million and $125 million in March quarter.

Muthoot Microfin recently announced closure of its $113 million fund raise through ECB route.

Overseas borrowing

With the expected cut in US Fed rate looming, NBFCs have started increasing borrowing overseas after their cost of capital went up following the RBI decision to raise their risk weightage. Overseas borrowing will help NBFCs to meet their funding requirement amid high credit demand, said a senior bank official.

Overseas borrowing by highly rated NBFCs will grow because hedging costs were low and global interest rates are on softening bias, he added.

Nikunj Saraf, Vice President, Choice Wealth said RBI has adopted a stricter approach to credit disbursement by banks, particularly regarding NBFCs and this cautious stance stems from concern on potential systemic risk in the financial system.

While NBFCs are actively seeking to tap cheaper foreign markets for funds requires, they have to develop robust foreign currency risk management strategies, he added.

Despite these challenges, India’s macroeconomic structure necessitates credit expansion as the nation strives to become the world’s third-largest economy and this inherent growth trajectory will continue to fuel demand for NBFC lending services, Saraf said.

ICRA’s projection

ICRA projects growth in the NBFC sector will moderate, especially in the non-mortgage retail loan segment, on back of expanded assets under management following the high growth rates seen in the past two fiscal years. The personal and consumption loan segments, which grew at steep rate in the previous two fiscal years, will experience relatively muted growth in the current fiscal year in light of regulatory actions on such loans.

The AUM of NBFCs (excluding housing finance companies and infrastructure finance companies) may grow at a relatively muted but healthy rate of 19 per cent in this fiscal against about 24 per cent in last two fiscals. Companies’ asset quality and earnings may weaken with non-performing assets increasing by up to 30 basis points from March and earnings declining 20-40 basis points from FY’24, as growth slows and the expectation of tighter liquidity keeps cost of funds elevated.

Growth rates for HFCs and infrastructure NBFC will moderate to 14 per cent and 12 per cent in this fiscal. These companies may face relatively limited pressure on their loan quality and earnings compared to their peers, said ICRA.

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