NBFC sector resilient under scale-based regulations framework: RBI bulletin

Last Updated25/09/2024

The non-banking financial companies (NBFC) sector in India continues to demonstrate resilience within the scale-based regulations (SBR) framework, improving in asset quality and diversifying its funding base

The non-banking financial companies (NBFC) sector in India continues to demonstrate resilience and growth under the Scale-Based Regulation (SBR) framework introduced in October 2022, according to an article by the Reserve Bank of India (RBI) titled “Peeling the Layers:
A Review of the NBFC Sector in Recent Times” in its September 2024 bulletin. The sector has shown improvement in asset quality, profitability, and diversification of its funding base, while maintaining strong capital levels and a low delinquency ratio.

The gross non-performing asset (NPA) ratio for NBFCs decreased from 4.4% (government NBFCs) and 10.6% (non-government NBFCs) in December 2021 to 2.4% and 6.3%, respectively, by December 2023. This reflects better risk management and enhanced provisions.
Upper-layer NBFCs maintain lower gross NPA ratios than middle-layer NBFCs, though the latter’s higher provisions have brought their net NPA ratios below those of the upper layer.

The NBFC sector maintained double-digit credit growth by the end of December 2023, indicating robust financial health.
Return on assets (RoA) and return on equity (RoE) have improved, signifying a rise in profitability.
NBFCs have demonstrated strong growth in secured retail lending, particularly in gold loans, vehicle loans, and housing loans, with continued expansion in the industrial and service sectors.

The PCA norms, aimed at monitoring capital and asset quality, will be applicable to government-owned NBFCs from October 1, 2024. This move is expected to enhance financial discipline and risk management within the sector.
As of December 2023, most NBFCs, including government-owned ones, have adequate capital levels and low net NPAs, ensuring compliance with PCA guidelines.

With rising risk weights on bank lending, NBFCs are diversifying their funding sources to reduce reliance on bank borrowings. This strategic shift will help the sector maintain financial stability and adapt to the evolving financial landscape.

The RBI cautioned NBFCs to remain vigilant about emerging risks, particularly in cybersecurity and climate risk.
Strengthening assurance functions such as risk management, compliance, and internal audit will be crucial in sustaining the sector’s robustness and resilience.

The RBI has identified several large NBFCs as part of the upper layer under the SBR framework, including major players such as LIC Housing Finance, Bajaj Finance, Shriram Finance, Tata Sons, and others.
All companies, except Tata Sons (which voluntarily surrendered its registration), have either complied with or are in the process of complying with the listing requirements.