Banks have been at the forefront in lending money to NBFCs through the loan route, and also are major subscribers to their NCDs. Other investors are mutual funds, pension and provident funds, insurance companies, and corporate treasuries. However, mutual, pension and provident funds are more comfortable taking exposure to higher-rated papers in the AA and AAA category. The government’s idea of setting up a ₹300-billion backstop fund to provide liquidity at times of stress, will increase the confidence of investors and provide stability to the market.

NBFCs are one of the largest issuers of debt paper. If a limit is earmarked within this, it could be a confidence booster for the sector. Due to changes in tax regulations, mobilising funding through the ECB route and PP-MLD route became challenging, given that investors returns have gotten curtailed lately.

Although not a significant proportion of funds was borrowed through this route, the recent changes led to reliance on domestic and traditional sources to raise funds. Post the increase in repo rate from May 2022 by 250 bps, capital markets were the first to react and rates hardened on debentures. NBFCs shifted their focus to bank funding which was relatively cheaper.

However, now even banks MCLRs have increased considerably though not by the same delta as repo. Hence, NBFCs are planning their borrowing requirements with equal focus on banks and NCDs. But what needs to be noted is that bank exposure to NBFCs only through the loan route has increased substantially and reached around 10 per cent of the non-food credit and has grown by 22 per cent on a y-o-y basis as on Nov 17, 2023. Banks have also taken exposure through NCDs in the NBFC sector and are participants in the securitisation market.

On the other hand, mutual funds have been quite selective in taking an exposure to the sector, restricting themselves to the higher rated papers.

Ind-Ra opines that NBFCs will resort to more of retail issuances of debentures which lend granularity to funding and also diversification of investor base. Funding requirement is increasing for NBFCs since their already large balance sheets are growing at a robust pace. NBFCs have also started to grow their franchisee in an asset light manner by getting into co-lending and banking correspondents (BC) arrangements with other lenders.

This optimises the use of capital and Ind-Ra opines that these arrangements will gain further traction. The RBI has also increased the risk weight on bank lending to NBFCs (for Non PSL and Non HFC), which has increased the cost of borrowings and may weigh on the growing exposure of banks to NBFCs.


NBFCs will also increasingly resort to securitisation to mobilise funds since that is a cost-effective debt capital option. Relatively newer asset segments such as unsecured loans are also being securitised to a select few investors. Larger NBFCs could also tap international markets for securitising assets. NBFCs had cut down their reliance on commercial paper post IL&FS crisis and during the pandemic, but with now with the normalisation of operating environment, Ind-Ra opines that NBFCs will mobilise CP in higher proportion, thereby managing asset liability gaps optimally. Smaller NBFCs may rely on banks and larger NBFCs for their funding requirements.

This increases interconnectedness of various lenders in the market since banks are major lenders to these large NBFCs. But smaller NBFCs (lower rating scale of BBB and A) have demonstrated the ability to mobilise funding from financial institutions (domestic and foreign) that lend towards specific end use such as green housing, social impact through SME funding, affordable housing, and women entrepreneurs. Lower-rated NBFCs have also entered into tie-up with larger NBFCs, banks and fintechs to increase their franchisee.

public deposits

Finally, deposit-taking NBFCs have focussed on public deposits, which are granular and have healthy rollover rates. Retail investors in search of yields have invested in deposits of NBFCs. The increase in deposit customer franchisee also helps NBFCs in cross-selling asset products to the same customers. However, from the cost perspective it’s not a very effective source, but they lend diversification to the liability franchisee. Ind-Ra opines that in FY25 NBFCs will focus more on off book tie-ups to increase franchisee, CP mobilisation keeping sanctity of ALM, higher securitisation and an evenly balanced funding mobilisation from banks and capital markets. NBFCs will also look for newer avenues (domestic and international) to raise funds.

(The writer is Director, India Ratings & Research)