Indian Non-Bank Financiers Brace for Funding Shift Amid Regulatory Changes and Rising Competition in 2023

In a pivotal shift, India’s non-banking financial companies (NBFCs) are set to diversify their funding sources in 2023 following an improvement in asset quality and stronger balance sheets. However, increased competition and a regulatory move by the Reserve Bank of India (RBI) are expected challenges.

In November, the RBI raised risk weights on bank loans to NBFCs and unsecured loans, potentially making loans more expensive. A.M. Karthik from Icra Ltd. highlighted that 2023 will witness increased competitive pressures, margin compression, and a focus on diversified funding profiles.

The RBI’s scale-based regulations categorize NBFCs into layers based on size and risk. Recently, the regulator listed 15 upper-layer NBFCs, including Tata Sons and Shriram Finance. Some hope the RBI will reconsider risk weight guidelines, differentiating between consumption and productive sector lending.

Despite these challenges, K.V. Srinivasan, CEO of Profectus Capital, anticipates growth in the coming year, especially with a stable government. Crisil expects NBFCs’ assets under management to expand 14-17% in FY25, although growth may be slightly lower due to the impact of risk weight guidelines on unsecured retail loans.

To mitigate reliance on banks, NBFCs are exploring alternative funding avenues. Commercial paper issuances and securitization have rebounded, with a rising share of mid-sized NBFCs in non-convertible debenture issuances. Co-lending arrangements with banks are also on the horizon, providing new opportunities for collaboration.

Shachindra Nath, Founder and MD of U GRO Capital, emphasized plans to expand lending products and diversify their lender base, with banks contributing 38% to their overall liability mix. As the financial landscape evolves, NBFCs aim to navigate regulatory changes, foster innovation, and sustain growth in the dynamic market.