NBFCs in the upper layer, all of which are privately owned, provide a major chunk of their gross advances to the retail segment, while the middle layer provided maximum credit to the industry. Government NBFCs that fall in the middle layer are large providers of credit to the infrastructure segment of industries, a recent report by RBI on performance of NBFCs stated.
Within retail segment, vehicle loans and loans against gold occupied the top two positions in terms of their share in gross advances, at around 12 and 4 per cent, respectively at end-December 2022.
Talking about the industry and service sectors, NBFCs extended about 7% of their outstanding gross advances to the micro, small and medium enterprises (MSMEs), which grew significantly at end-December 2022 over end December 2021.
Banks remain primary source of funding
Domestic non-banking financial companies (NBFCs), especially those in the upper-layer category, are increasingly relying on bank borrowings as their primary source of funding.
NBFCs primarily finance their operations through a mix of market borrowing and bank loans, constituting around 75% of total borrowings.
Substantial reliance on banks makes them the largest net borrowers, thus intricately linking them to the broader financial system.
RBI in its report has also highlighted that the reliance on banks increased steadily due to low interest environment and lag monetary policy transmission.
The banks’ share in aggregate NBFC borrowings rose to 35.1% last December, against 29.7% in December 2020.
RBI report highlighted that the direct bank borrowings by the upper-layer NBFCs grew steadily in recent quarters, accounting for nearly half of the total borrowings at the end of December 2022.
While those in the middle layer relied more on debentures, although their bank borrowings also grew in recent times. Upper-layer NBFCs seem to be more successful in raising short-term debt through commercial papers.
It is to be noted that the upper layer NBFCs comprise names like Tata Sons, LIC Housing Finance, and Shriram Finance.
Profitability of NBFCs
As indicated by return on assets (RoA), return on equity (RoE) and net interest margin (NIM), profitability varied across the layers. At the sector level, all profitability indicators, except RoA, showed some moderation in Q3FY23 when compared with the same period last year.
On the other hand, the upper layer fared better when assessed over the same period.
The sector witnessed reduction in GNPA and NNPA ratios at end-December 2022. This was mainly on account of low accretion, better recoveries, and write-offs.
Indicating a stronger financial position along with a lower default risk, NBFCs have maintained adequate capital at an aggregate level. Its capital to risk-weighted assets ratio (CRAR) was at 25.8%, which was well above the regulatory requirement of 15% at end-December 2022.
The RBI research highlighted that going forward, NBFCs need to diversify their funding sources, thereby reducing excessive reliance on bank borrowings.
