The Reserve Bank of India (RBI) has guided non-banking finance companies (NBFCs), especially upper-layer NBFCs, to maintain at least 25 per cent of their overall borrowings from capital market instruments such as commercial papers, non-convertible debentures (NCDs), external commercial borrowings (ECBs), among others, sources aware of the development said.
“The RBI has guided NBFCs to diversify their liability base to reduce reliance on bank loans. They have asked us to maintain at least 25 per cent of borrowings from capital market. Currently, majority of NBFCs have higher share of bank borrowing,” a source said. The RBI did not respond to businessline queries till press time.
Push for diversification
To be sure, the central bank had in November last year hiked risk weight on bank loans to NBFCs by 25 per cent over and above the risk weight associated with the given external rating in all cases where the risk weight as per external rating of NBFCs is below 100 per cent.
This led to a sharp slowdown in bank loans to NBFCs. According to the RBI’s latest sectoral credit deployment data, banks’ loans to NBFCs grew by 12 per cent year-on-year (y-o-y) to ₹15.22 lakh crore as on August 23, sharply lower than the 21 per cent y-o-y growth seen in the same period last year.
Separately, lenders including State Bank of India (SBI) have been in talks with the RBI to cap the number of banks that a NBFC can take loans from. Currently, some NBFCs have upwards of 40 banks in their bank borrowing base, making it hard for banks to monitor portfolio of NBFCs.
On their part, large sized NBFCs have started raising funds from ECBs to diversify their borrowing base. NBFC major Shriram Finance, for instance, has said it plans to raise up to $1.5 billion from the overseas market in the current fiscal to diversify borrowings. Earlier this month, Piramal Capital & Housing Finance raised $150 million from international capital markets at 7.078 per cent interest rate. Issuances of CPs and NCDs have seen similar rise.
Overall, top NBFCs like Bajaj Finance, Aditya Birla Capital, L&T Finance, and a majority of large NBFCs have seen slight shift in their borrowing mix, wherein share of bank loans have reduced. According to a senior official at a major NBFC, the Securities and Exchange Board of India proposed two years ago that NBFCs should issue more retail-friendly bonds to strengthen the bond market and boost retail participation.
Challenges ahead
While the regulator is keen on NBFCs diversifying their borrowing base, senior industry players say small and mid-size NBFCs struggle to raise funds from capital market due to lower credit rating.
“If the RBI allows at least all the upper layer NBFCs to accept deposits, reliance on bank loans will anyway lower. Small sized NBFCs cannot tap the capital market due to rating constraints and rely on bank loans. Instead, the RBI is informally asking few small sized NBFCs who have deposit taking license to stop accepting deposits,” a source said.