The Business Bytes
Bhubaneswar, September 30, 2024 (TBB Bureau): 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 fuel their growth. This shift comes amid a slowdown in bank loans after risk weights on lending to higher-rated NBFCs were raised last year.
A recent analysis of over 110 NBFCs rated by CRISIL Ratings, which collectively account for more than 95% of the sector’s assets under management (AUM), shows a 60 basis point (bps) drop in the share of bank loans in the sector’s borrowings, down to 47% as of June 30, 2024. The decline is more pronounced for NBFCs rated ‘A and below’ compared to those rated ‘AAA’ and ‘AA’.
Malvika Bhotika, Director, CRISIL Ratings, commented: “While banks will continue to be the primary funding source for NBFCs, the bond market is set to gain a larger share in the near to medium term. In fact, the share of NCDs in the sector’s borrowings increased by 30 bps to 28.5% in the June quarter, particularly among ‘AAA’ and ‘AA’ rated entities. Even those rated ‘A and below’ have seen a rise in NCD share by 40 bps, though from a smaller base. We anticipate the bond market will become even more attractive in the coming quarters with the expectation of a repo rate cut.”
Improved investor confidence, bolstered by stronger balance sheets and robust liquidity, will further support NBFC issuances. Many NBFCs have maintained liquidity coverage ratios well above regulatory requirements, positioning them favorably in the market.
To sustain growth, funding diversification will be crucial for NBFCs in the near to medium term. With bank lending becoming more expensive—rising by 20-50 bps over the last few quarters—NBFCs are seeking to optimize borrowing costs by exploring alternative funding channels. CPs, FCBs, and securitisation accounted for 16.1% of the sector’s borrowings as of June 2024, and their importance is expected to grow.
NBFCs have seen renewed momentum in CP issuances, with volumes reaching levels last seen five years ago. Mutual funds, among the largest investors in CPs, held record-high investments in July 2024, the highest in six years. Securitisation also surged, with volumes touching ₹1.9 lakh crore in fiscal 2024, a figure last seen four years ago.
Rounak Agarwal, Associate Director, CRISIL Ratings, said: “Securitisation remains one of the preferred alternative funding routes for NBFCs. Notably, NBFCs in the ‘A and below’ rating categories have partially offset the decline in their bank borrowings through securitisation, with its share rising by around 30 bps in the June quarter. Meanwhile, ‘AAA’ and ‘AA’ rated issuers have increasingly relied on FCBs, benefiting from lower hedging costs. The share of FCBs in their borrowings rose 50 bps to 5.3% during this period.”
Looking ahead, NBFCs are expected to maintain a diversified funding mix to secure their growth trajectory and manage borrowing costs effectively.
