The funding profile of small- and mid-sized NBFCs is improving, which is credit-supportive and will aid loan growth, according to India Ratings.

“The evolving funding ecosystem between banks and mid- and small-sized NBFCs is credit-supportive for the latter. With improving funding access, there will be stiff competition among mid- and small-sized NBFCs,” it said. 

Bank lending to NBFCs grew 31 per cent year-on-year as of September 2022, led by increase in capital market rates in H1 FY23, which prompted NBFCs to focus on banking channels to raise funds. This led to an increase in funding costs for mid and small NBFCs, which are majorly dependent on banks.

However, these entities, too, saw increased confidence from banks, led by the resilience shown during the pandemic, support by sponsors and shift in regulatory guidelines to reduce the gap between banks and NBFCs.

With banks’ lending rates now increasing sharply due to tightening liquidity, and relatively stable capital market rates, large NBFCs could partially move to tap incremental funding through the capital market, said the ratings agency in a note.

“Rates in CPs (commercial papers) and short-term bond markets seem to have stabilised. Therefore, large NBFCs would increase the proportion of CPs in the funding mix in the near term,” it said, pegging the share of CPs in total borrowings at around 10 per cent.

As such, some pressure is seen on NIMs (net interest margin) of NBFCs due to the 80-100 bps rise in funding costs in FY23.

NBFCs would be able to pass on the increase to borrowers in select segments such as unsecured business and personal loans, small-ticket loans against property, two-wheeler loans and microfinance loans owing to the dynamics of the segments and competitive landscape.

However, NBFCs in extremely competitive segments such as big-ticket loans against property and housing loans may have to absorb some of the rise in funding cost, thus affecting their margins, said India Ratings.