Mixed Reactions in NBFC Stocks Post RBI’s CRR Cut

The Reserve Bank of India’s (RBI) recent decision to cut the Cash Reserve Ratio (CRR) by 50 basis points has injected liquidity into the banking system, but its impact on Non-Banking Financial Companies (NBFCs) has been mixed. While leading NBFCs like Bajaj Finance witnessed a stock price rise of around 4%, and gold loan players such as Muthoot Finance and Manappuram Finance saw gains, other segments, including NBFC-Microfinance Institutions (MFIs), experienced declines. This uneven response underscores investor caution, with decisions being made on a case-by-case basis rather than an industry-wide optimism.

Declining Bank Lending to NBFCs: A Closer Look

The slowdown in bank lending to NBFCs is not surprising, given the regulatory headwinds the sector faces. Several factors have contributed to this trend:

Increased Risk Weightage: Last year, the RBI increased the risk weightage on NBFC loans by 25 basis points to 125%. This move made loans to NBFCs more capital-intensive for banks, discouraging lending.

Liquidity Coverage Ratio (LCR) Norms: Proposed changes in LCR norms require banks to maintain a higher proportion of liquid assets. Additionally, a 5% runoff factor on retail deposits facilitated through digital platforms has further constrained funds available for lending to high-risk borrowers, including NBFCs.

RBI Warnings: The central bank’s repeated cautioning about rising exposure to high-risk NBFCs has nudged banks to reduce their lending.

Data Speaks: A Grim Outlook

The impact of these measures is evident in RBI’s data on bank lending to NBFCs. Bank lending to the segment has contracted by 0.7% until October 18 this fiscal year, compared to a robust 7.6% growth in the corresponding period last year. Year-on-year growth also plunged sharply to 6.4% as of October-end, down from 18.3% in the previous year.

In absolute terms, lending fell to ₹15.3 lakh crore from ₹15.5 lakh crore. The fallout has been particularly severe for smaller, low-rated NBFCs (rated AA and below), which are more reliant on bank funding. In contrast, larger, top-rated NBFCs have turned to alternative sources such as the money markets to meet their funding needs.

RBI’s Concerns About NBFC Loan Books

The RBI’s discomfort stems largely from the nature of NBFC loan portfolios, which are heavily tilted towards high-margin, high-risk unsecured loans. While these loans have been lucrative for NBFCs due to their ease of disbursal and attractive margins, they also pose significant risks during economic downturns. Rising defaults in these segments can lead to a surge in non-performing assets (NPAs), potentially affecting the balance sheets of both NBFCs and their lending banks.

In response to the RBI’s warnings, both banks and NBFCs have started curbing their exposure to unsecured loans. This is a necessary but challenging transition for the industry as it seeks to balance profitability with prudence.

Moderation in Industry Growth

According to a December 2 note by rating agency Crisil, growth in assets under management (AUM) for NBFCs is expected to slow to 15-17% in the current and next fiscal years. This marks a decline of 600-800 basis points from the strong 23% growth seen last fiscal. While this projected growth is still above the decadal average of ~14% (fiscal 2014-2024), it signals a cooling off as NBFCs adapt to evolving regulatory and operational dynamics.

Crisil identifies three key factors contributing to this moderation:

Rising Household Indebtedness: Concerns around rising debt levels and associated asset quality risks are forcing NBFCs to recalibrate their growth strategies, particularly in segments like microfinance and unsecured loans.

Enhanced Regulatory Compliance: Stricter norms on customer protection, pricing disclosures, and operational compliance are increasing costs and complexity for NBFCs.

Diversified Funding Challenges: Access to diversified funding sources has become a critical determinant of growth. With bank lending slowing, smaller NBFCs face significant challenges in raising funds, unlike their larger counterparts who have access to corporate bond markets and external commercial borrowings (ECBs).

Will the CRR Cut Boost Bank Lending?

The CRR cut is expected to inject ₹1.16 lakh crore into the banking system, but its impact on NBFC lending may be limited. The fundamental reasons for the slowdown in bank lending—RBI’s concerns over the high-risk nature of NBFC portfolios and the proposed LCR norms—remain unchanged.

According to Sanjay Agarwal, Senior Director at CARE Ratings, top-rated NBFCs are unlikely to turn back to banks for funding anytime soon. These companies are securing cheaper funds from overseas bonds and ECBs, even after accounting for hedging costs. They also benefit from robust supply in the domestic corporate bond market and private sources like Alternative Investment Funds (AIFs) and family offices.

Smaller, low-rated NBFCs, however, continue to struggle. Banks typically avoid lending to such entities due to their perceived risk. This dynamic is unlikely to change in the near term, despite the additional liquidity in the banking system.

Looking Ahead: A Glimmer of Hope in 2025?

The lending landscape may shift if interest rates decline significantly in 2025. The RBI is expected to ease rates by 50-75 basis points next year, provided inflation sustains below 5%. Lower rates could make bank loans more attractive for top-rated NBFCs, potentially reviving lending activity. However, this recovery would depend on broader economic conditions and the ability of NBFCs to align with regulatory expectations.

Conclusion

The RBI’s CRR cut has provided immediate liquidity to banks but has done little to alleviate the structural challenges facing NBFCs. With regulatory pressures mounting and access to traditional funding sources narrowing, the sector is navigating a period of recalibration. While larger, well-rated NBFCs continue to find alternative funding avenues, smaller players face significant hurdles. The road ahead will depend on how effectively the sector adapts to these challenges and the trajectory of interest rates in the coming years.

The image added is for representation purposes only