Funding Challenges May Impede NBFCs, HFCs Growth, Says India Ratings

Growth of non-bank lenders and housing finance companies are likely to constrained due to the increased cost of funds in fiscal 2024, according to India Ratings & Research Pvt.

Banks and capital markets combined accounted for 73% of the funds raised by non-bank lenders in the first nine months of FY23, India Ratings said. "As we start FY24, banks are increasingly facing challenges, with many of them approaching their internal exposure limits, largely public sector banks."

Banks may revisit their exposure limits in 2024 fiscal, but loan growth in the non-bank segment and its high sectoral concentration could be a limiting factor, the note said.

Bank funding to NBFCs has grown sharply over FY23, to Rs 13.09 lakh crore in February 2023, from Rs 9.8 lakh crore in February 2022, according to RBI data. Growth of bank credit to NBFCs has also far outpaced overall growth in bank credit over FY23. 

"Banks, in addition to the direct loan exposure to NBFCs, have invested in their capital market issuances—non-convertible debentures and commercial papers, along with buying pools," India Ratings said. Banks' overall exposure to NBFCs could be as much as 41% of NBFCs' borrowings as of September 2022, according to the RBI's financial stability report.

There could be a partial shift of borrowings by non-bank lenders during fiscal 2024 back to the capital markets as they have turned attractive, the note said. This could help non-banks garner their incremental funding needs from the capital markets, thereby balancing their increased dependence on a single channel of funding, it said.

Although NBFCs have also tapped foreign commercial borrowings to diversify their resource base in the past, rising interest rates globally have reduced the attractiveness of that option. "This means not only that fresh funding will be difficult from this source, but also that the existing offshore borrowings will largely be refinanced domestically as they mature, putting further pressure on domestic requirements," India Ratings said.

The capital funding market for non-bank lenders may also open up a little after the merger of HDFC Limited with HDFC Bank, the note said. HDFC Ltd. alone accounts for about 11.4% of banks' exposure to non-bank lenders.