NBFCs will have to diversify funding sources in 2024

Issuances of commercial paper and bonds by non-bank lenders have started gathering pace

- Shayan Ghosh

• 14-17% AUM expansion of NBFCs expected in FY25, as per Crisil
• 25-27% NBFC AUM is made of home loans and vehicle finance

Non-bank lenders that borrow heavily from commercial banks to lend further may need to diversify their funding sources in the year ahead, given the rising competition for bank credit, and higher risk weights on loans to these lenders, experts said.

In fact, issuances of commercial paper, a short-term debt instrument, and bonds have already started gathering pace, they said.

In November, the Reserve Bank of India (RBI) increased risk weights on bank loans to non-banking financial companies (NBFCs) and also on unsecured loans that NBFCs disburse to their borrowers, by 25 percentage points each. This move will make loans more expensive as it requires them to set aside more capital as a safety measure, likely prompting them to pass on the increase in credit cost to customers.

"Increased competitive pressures, margin compression on account of funding cost increases, and asset quality performance would be the key trend to monitor in the next year. Entities would diversify their funding profile going forward, which shall be the key differentiator," said A. M. Karthik, senior vice president and co-group head, of financial sector ratings, Icra Ltd.