With the Reserve Bank of India (RBI) tightening its scrutiny on the activities of non-banking financial companies (NBFCs), industry experts predict that many NBFCs will reconsider their reliance on deposits. While larger NBFCs with good credit ratings and established brand names may continue to attract deposits, smaller entities are likely to explore alternative funding avenues.
There has been a resurgence in demand among NBFCs for deposit licences, driven by the high cost of borrowing.
Unlike banks, these entities cannot accept low-cost current account savings account (CASA) deposits, compelling them to offer higher interest rates or longer tenure deposits.
However, the RBI has consistently communicated its reluctance to issue new deposit licences to NBFCs, citing the paramount objective of protecting depositors’ interests.
Operational challenges
Deposit-taking NBFCs catering to the underbanked segment often require a physical presence to establish trust. However, the operating model demands significant investments in fixed-income securities to secure deposits, potentially resulting in an asset-liability mismatch.
The NBFC sector in India is experiencing a transformation in its funding dynamics as deposit-taking entities face increased regulatory scrutiny from the RBI. This shift is driven by a combination of factors, including regulatory stringency, the RBI’s cautious approach to issuing fresh deposit permits, and challenges faced by small and medium-sized NBFCs in building a substantial deposit base.
Recent data from the RBI highlights a significant reduction in the number of deposit-taking NBFCs, plummeting from 241 in March 2014 to a mere 26 in September 2023. The deposit base of non-bank lenders stood at Rs 96,156 crore as of September 30, reflecting the evolving landscape of these financial entities.
Deposit-taking NBFCs operate under stringent regulations, irrespective of their size and scale. The RBI has been vocal about discouraging deposit acceptance by NBFCs, considering it an uncharacteristic shift for these entities to emulate traditional banks. The regulatory framework requires NBFCs to have a minimum investment grade rating of BBB- to accept deposits. However, this has posed challenges, especially for smaller NBFCs that lack the necessary infrastructure and brand recognition to build a liability franchise.