NBFCs' Aggressive Growth: High-Risk Lending and the NCD Impact on Bank Deposits
The financial sector in India is witnessing a concerning shift as Non-Banking Financial Companies (NBFCs) outpace traditional banks in deposit growth and lending activities. In the fiscal year 2023-24 (FY24), NBFCs saw their deposit base grow by an impressive 21%. In contrast, banks recorded a deposit growth of 13.5% in FY24, with more recent data showing an even lower deposit growth of 11% in July 2024. To attract more deposits, banks increased their fixed deposit rates, resulting in their growth of over 18% in FY24, significantly higher than the 6% growth in savings deposits. Despite this, their overall deposit growth has lagged credit growth by 4-5 percentage points.
While banks grapple with managing their credit-deposit growth ratios, NBFCs have effectively balanced their deposit growth with credit expansion. They are authorized to raise public deposits for tenures ranging from 12 to 60 months, offering attractive options to savers. Their ability to offer higher interest rates—often about 150 basis points more than banks—has bolstered their deposit mobilization efforts. This strategy has paid off significantly: Non-bank financial companies have increased their share in total credit to more than one-fourth now from a share of only one-sixth a decade ago.
The proliferation of NCDs in the retail market is another factor making it difficult for banks to mobilize deposits. Savers are increasingly drawn to the higher returns offered by these NCDs, diverting liquidity that might have otherwise flowed into bank deposits.
NBFC Lending Landscape: A Closer Look
Delving into the specifics of loans issued by NBFCs in 2023, the total lending amounted to approximately ?32 lakh crore. About 65%-70% of these loans are secured, backed by tangible assets, while the remaining are unsecured. Here's a breakdown:
Stable, Asset-Backed Categories:
These categories form the solid foundation of NBFC lending, secured by assets like property, vehicles, gold, and financial securities.
Mixed Secured and Unsecured Loan Categories:
Some categories include both secured and unsecured loans.
Unsecured and High-Risk Categories:
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Despite being unsecured, these categories have seen substantial growth, highlighting NBFCs' aggressive expansion strategies.
To navigate these regulatory headwinds, NBFCs are increasingly turning to direct retail fundraising through Non-Convertible Debentures (NCDs). While typically secured, these instruments carry their own set of risks, as they're often backed by the NBFCs' outstanding credit.
High-Risk Lending: NBFCs' Aggressive Growth Strategy
In late 2023, the Reserve Bank of India (RBI) assigned higher risk weights to certain high-risk credit types to pre-empt potential risks in these segments. This move led to a moderation in the growth rates of such loans in banks. For instance, growth in unsecured personal loans across the financial system slowed to approximately 18% year-on-year in the first quarter of FY25, down from 23% in FY24 and 31% in FY23.
However, NBFCs continue to accelerate their lending in high-risk loan segments. In the first quarter of FY25, NBFCs reported a staggering 38% year-on-year growth in personal loans, significantly outpacing the system-wide growth of 18%. This surge persists despite the higher risk weights imposed by the RBI on such loans.
The RBI has also increased risk weights on banks' lending to NBFCs, which has made bank funding more expensive for NBFCs. As of April 2024, outstanding bank credit to NBFCs stood at ?15.54 lakh crore, growing at 14% year-on-year, down from 29% in April 2023.
To navigate these regulatory headwinds, NBFCs are increasingly turning to direct retail fundraising through Non-Convertible Debentures (NCDs). While typically secured, these instruments carry their own set of risks, as they're often backed by the NBFCs' outstanding credit.
Consequently, the proliferation of NCDs in the retail market is another factor making it difficult for banks to mobilize deposits. Savers are increasingly drawn to the higher returns offered by these NCDs, diverting liquidity that might have otherwise flowed into bank deposits.
Empowering Business Efficiency with Contract Lifecycle Management | Business Development Manager
2 个月Interesting insights on NBFC growth! Their growth in deposits and lending is reshaping the financial landscape. A CLM tool enhances contract management, streamlines compliance, and improves customer interactions, enabling NBFCs to overcome challenges and drive growth!