Non-banking finance companies have improved their asset-liability positions by trimming dependence on short-term borrowing and increasing preference for long-term funding sources, but in case of extreme liquidity conditions, 34 firms may face stress, the Reserve Bank of India said.
“The results (of stress scenarios) indicate that the number of NBFCs, which would face negative cumulative mismatch in liquidity over the next one year in the baseline, medium and high-risk scenarios, stood at 6, 17 and 34, respectively,” the RBI said in its December 2023 Financial Stability Report.
Under the RBI’s stress scenario, six NBFCs represent 1.3% of the asset size of the sample, 17 non-bank firms represent 10.4% and 34 firms account for 15%, respectively.
Based on five-year data, a study of the asset-liability management profile of the top 50 NBFCs showed that 76% of bonds issued by the non-bank lenders had a residual maturity of up to five years in September 2023, down from 88% in September 2018. This indicates elongation in the maturity of bonds, the RBI said. Share of short-term borrowing for the 50 NBFCs as a share in total borrowing reduced to 37.3% in September 2023 from 47.7% five years ago.
On the asset front, 67% of loans for the top 50 NBFCs had a maturity of less than three years in September 2023, down from 80% five years back, the RBI said. “Together with their increasing preference for longer term sources of funds, there has also been a shift towards long-term uses of funds.”
The aggregate lending by NBFCs rose by 20.8% on-year in September 2023 from 10.8% a year ago, mainly driven by personal loans and loans to industry. Over the past four years, the compound annual growth rate for personal loans was nearly 33%, far higher than overall credit growth, which was close to 15%.
Highlighting the risks of interconnectedness between banks and NBFCs amid strong growth in retail loans, the RBI outlined the impact of its recent decision to increase risk weights on some categories of consumer loans by banks and non-bank lenders. Adjusting for the increase in risk weights, the capital to risk (weighted) asset ratio (CRAR) of the banking system is projected to decline by 71 bps to 16% and common equity tier-1 capital could decline by 58 bps to 13.2%. The impact, however, varies among banks, the RBI said.Turning to banks’ investment portfolios, the RBI said that a prolonged period of elevated interest rates could test the resilience of the sector because of valuation losses.
Banks are holding 63.6% of their investments in the held-to-maturity portfolio, which are not marked-to-market. A study of unrealised losses on securities held in this portfolio shows that losses are lower than their March 2023 levels and the impact on CET-1 ratio was limited for most banks.
