In a bid to further streamline the unsecured loans market, the Reserve Bank of India has asked some of the larger non-banking finance companies to curtail their lending to smaller peers.

It has been observed that these smaller NBFCs, reckoned as digital lenders and fintech lenders, often play a dominant role in the unsecured loans space, particularly the small-ticket personal and business loans segment. These players often tap the large NBFCs as their primary source of funding, as availing bank funding could be challenge for them.

“Invariably, such small NBFCs don’t have the required rating strength to directly tap the banking channel for funds at competitive rates and hence they turn to large NBFCs,” said a person directly aware of the development.

Loan exposure

At present, loan exposure of large NBFCs to smaller players including microfinance lenders is 15–40 per cent of their total loans, while in exceptional cases such as MAS Financial Services the exposure to non-banks exceeds 70 per cent of its total loans and advances.

Among the larger names, Piramal Enterprises has about 19 per cent exposure to NBFCs, including loans to NBFC-MFIs, while Aditya Birla Capital has about 27 per cent exposure to mid-market and corporate loans.

Although the yield may not be very rewarding, for the large NBFCs on-lending to their smaller peers helps in adding bulk to their loan books and adds up as an important business vertical for them.

In some cases, it has been observed that the NBFCs on-lending to small peers have operational arrangements for loan products as well. For instance, large NBFCs source digital loans through the smaller NBFCs with whom they already have a relationship for loans and advances.

“The regulator is of the view that such an arrangement could turn dicey for the ecosystem if there should be any major disturbance in the unsecured loans space,” said another person aware of the issue.

Industry observers say that the directions to large non-banks with respect to their exposure to smaller peers are akin to the guidance given to banks about three years ago when banks were wary of taking direct exposure to small-ticket loans.

“They were doing so through NBFCs and now with most banks directly engaged in the digital lending business without using fintechs as intermediaries, large NBFCs are filling the shoes of banks for these smaller players,” said a CEO of a retail non-bank who didn’t want to be named.


Further clamping unsecured loans

Large NBFCs asked to curtail lending to smaller peers.

Smaller NBFCs reckoned as digital and fintech lenders play pivotal role in the unsecured loans

These NBFCs tap the large NBFCs for primary funding channel

Lack of strong rating a hurdle to access bank funding at competitive rates

Loan exposure of large NBFCs to smaller players including MFI loans is 15–40 per cent total book

MAS Financial Services has 70% of its total loans to NBFCs

Piramal Enterprises exposure to NBFCs at 19% of total book

Aditya Birla Capital has 27% exposure to mid-market and corporate loans