Indian NBFCs to Shift Funding Strategy as RBI Eases Lending Norms

Indian non-banking financial companies (NBFCs) are likely to alter their funding patterns in the upcoming financial year following the Reserve Bank of India’s (RBI) relaxation of certain lending norms. The central bank has reduced the risk weight requirements on consumer microfinance loans for banks by 25 percentage points to 100%, effectively reverting to previous norms. This move is expected to free up capital for banks, making funding more accessible for NBFCs, according to George Alexander Muthoot, Managing Director of Muthoot Finance.

In recent quarters, NBFCs have relied heavily on short-term commercial papers (CPs) for funding, with their share of CP issuance remaining above 40% over the last seven quarters, up from under 30% previously, per Crisil Intelligence data. However, Bhushan Kedar, Director of Fixed Income Research at Crisil, anticipates a shift in the funding mix as NBFCs look to tap bank loans, particularly with expected interest rate cuts. Banks are likely to prioritize lending to large and highly-rated NBFCs before extending credit to lower-rated firms.

Despite the anticipated shift, the transition may not be immediate. According to Kishore Lodha, CFO of UGRO Capital, it could take six to nine months for banks to resume lending to NBFCs at previous levels, depending on further RBI guidance. The evolving funding landscape is expected to impact NBFCs differently, based on banks’ risk appetite and lending preferences.

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