Indian non-banking financial companies (NBFCs) are poised to adjust their funding approach in the upcoming financial year, following the Reserve Bank of India's relaxation of certain lending norms, which is expected to encourage banks to increase funding to this sector.
The RBI's recent adjustments to bank loan regulations for NBFCs involve reducing risk weight requirements for banks on consumer microfinance loans by 25 percentage points to 100%, effectively returning to the previous risk weight standards.
George Alexander Muthoot, managing director of Muthoot Finance, highlighted that this change will "free up capital for banks, allowing them to lend more to NBFCs," thus rendering bank funding more appealing for NBFCs.
Due to reduced funding availability from lenders in the past, NBFCs resorted to utilizing short-term commercial papers (CP) for their cash requirements, causing their share of total CP issuance to rise significantly.
According to data from Crisil Intelligence, the share of CPs issued by lending firms has consistently hovered around 40% or higher for the last seven quarters, a noticeable increase from less than 30% in preceding quarters.
Bhushan Kedar, director of fixed income research at Crisil Intelligence, foresees a forthcoming modification in the funding mix for NBFCs. He stated, "For NBFCs, the funding mix is expected to undergo change in the next year, and they would want to tap loans, especially with expected rate cuts, to widen their funding pool... The funding mix will change, and it could change more for some companies, depending on banks' preferences."
While Indian lenders are likely to initially prioritize lending to larger and highly-rated entities, they might gradually extend support to lower-rated firms as the year unfolds, as suggested by an anonymous banker.
Nonetheless, the shift in NBFCs' borrowing practices may not happen instantaneously. Kishore Lodha, chief financial officer at UGRO Capital, remarked, "It may take some time before banks resume lending to NBFCs at previous levels. It could take six to nine months, depending on how RBI guides banks on NBFC lending."