Despite challenges, NBFCs continue to maintain a strong capital position and adequate buffers, the paper says.
Non-banking financial companies (NBFCs) should reduce their excessive reliance on bank borrowings, according to a Reserve Bank of India (RBI) staff paper released in the RBI Bulletin for September. The paper, titled ‘An Analysis of the Recent Performance of NBFC Sector,’ pointed out that around “75% of the total borrowings of non-bank lenders are financed primarily through banks and market borrowings, making them the largest net borrowers.”
Furthermore, the paper noted that “Direct bank borrowings by NBFC-UL (upper layer) have grown steadily in recent quarters, accounting for nearly half of their total borrowings at end-December 2022.” While middle-layer NBFCs tend to rely more on debenture issuances, they have also increased their dependence on bank borrowings in recent times.
The paper emphasized the need for NBFCs to diversify their funding sources and reduce their dependence on bank borrowings. Additionally, it called for banks to “develop strong governance and risk management standards and be more vigilant about cybercrimes,” particularly in the context of the growing digital lending space, which offers both opportunities and challenges.
Digital lending
In terms of digital lending, the paper highlighted that “In 2019-22 (Apr-Mar), non-bank lenders sanctioned 60% of loans digitally compared to banks, which sanctioned 5.6% loans through the same channel.” It also noted that many new-age NBFCs are incorporating artificial intelligence and machine learning tools into their operations to enhance business processes and decision-making, a move encouraged by the RBI to facilitate seamless customer interactions.
Despite these challenges, the RBI paper acknowledged that NBFCs continue to maintain a strong capital position and adequate buffers. It observed that “With economic recovery underway, non-performing assets of the sector as per cent of total advances declined on account of lower accretion of fresh NPAs and better recoveries.”
