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What the June RBI FSR says about Indian NBFCs

5 Jul 2024 , 12:57 PM


Many years back, the chairman of a large NBFC said that the very term “NBFC” had a slightly peculiar tinge to it. It was almost like referring to women as non-men. He may have let his imagination a little wild, but the fact remains that NBFC as a name have stuck on. The NBFCs have been a classic case of small financial companies filling up the gaps in the banking operation. Today, banks themselves rely on these NBFCs for most of their last mile credit delivery and for co-lending to their niche customers. The RBI Financial Stability Report (FSR) normally dedicates a separate section to the soundness of these NBFCs. The latest RBI Financial Stability Report (FSR) for the second half of FY24, ending March 2024, has also outlined the story of NBFCs, especially the systemically important NBFCs in India. Even within the NBFCs, there are 5 categories, but the two categories of Investment & Credit Companies (ICCs) and Infrastructure Finance Companies (IFCs) make up nearly 94.3% of the total credit book of NBFCs. Here is what we read about NBFCs in the FSR for June 2024.

The NBFCs managed to maintain robust credit growth in the fiscal year FY24, although there was a credit slowdown in the second half of the fiscal year. This was due to the lag effect of the RBI strictures on consumer lending, which was imposed on banks and NBFCs. The NBFCs, which rely heavily on the consumer lending side, saw a direct and immediate impact of this move on their loan books. Towards the end of the first half of FY25, the RBI clamped down rampant consumer lending by increasing the risk weights. This made it more expensive for these NBFCs to expand their consumer lending books. That impact was seen in the second half of FY24. Also, the restrictions imposed on gold backed funding on certain NBFCs also had made the overall industry cautious. Hence, there was an overall slowdown in credit growth on NFBCs in the second half of FY24, as compared to the sequential first half of the fiscal year. Let us now turn to the granular details of NBFC loan growth.


As stated earlier, the loan growth for NBFCs in the second half slowed to 17.9% as compared to growth of at 20.8% in the first half of FY24. But what were the components that drove the loan book sharply higher? The agricultural loan grew at a robust pace of 39.6% in H2FY24, compared to 43.7% in the first half. However, this comes on a fairly small base. For NBFCs overall, the personal consumption loan book constitutes about 33.5% of the overall NBFC book. The personal finance loans by NBFCs slowed to 30.2% growth in H2FY24 as compared to growth of 32.5% in H1FY24. While the growth has tapered, the share of personal loans in the overall NBFC lending book has actually increased.

Among other segments catered to by the NBFCs, the total lending to the services sector grew by 18.7% in H2FY24, compared to just 17.3% in H1. The lending book to industry grew by 17.6% in H2FY24, again better than the 16.1% growth seen in H1. This segment sees most of the lending from the government sponsored financial institutions like REC, PFC, IREDA etc. The segment of miscellaneous loans was the only basket that saw negative growth in the second half of FY24.

For NBFCs overall, the industrial lending book constitutes the largest chunk of 36.8% of the overall NBFC book. This is closely followed by the personal loan book which accounts for 33.5% of the overall NBFC book, followed by the services lending book which constitutes 14.9% of the overall NBFC lending book. Let us look at the credit growth by the nature oof the NBFC. Credit growth by the NBFC sector in the post-pandemic period has accelerated for investment and credit companies (NBFC-ICCs) and stands at 24.4% in H2FY24. It also showed impressive growth of 27.4% for the micro finance institutions (MFIs), although the base is quite small. The other major growth basket is industrial financing, which is once again a very small part of the NBFC basket.


Over the years, asset quality has been a major challenge for NBFCs, especially in a scenario where the cost of funds are higher for NBFCs and they need to compete with the banks. However, the good news is that the gross NPAs (GNPAs) of NBFCs in the last four sequential quarters has been progressively coming down. For the half year ended March 2024, the overall GNPAs of the NBFC segment stood at 4.0%; sharply lower compared to 4.6% in September 2023 and at 5.0% in April 2023. The GNPA have improved by a full 100 bps in the last one year. The gross NPAs have fallen across all category of loans. Let us look at how the GNPAs have behaved across categories. As of March 2024, the gross NPAs of the NBFC loans to services sector has come down sequentially from 8.1% to 7.0%. At the same time, even the GNPAs of the NBFC loans to industrials has come down by 100 bps sequentially from 5.7% to 4.7%. On the other hand, the NBFC loans to agriculture have seen the GNPAs compress from 5.3% to 4.6%, so clearly, there is substantial improvement across.

Let us spend a moment on the personal loans and the consumption loans, which have been the mainstay for most NBFCs, with the best growth and the lowest NPAs. How did the consumer loans business of NBFCs fare on the GNPA front? Even the personal consumption loans saw the GNPA levels fall from 3.6% as of September 2023 to 3.1% as of April 2024. Let us take a slightly long term view on the GNPA situation of NBFCs over the last 18 months. Between September 2022 and March 2024, the overall GNPA ratio of the NBFC segment fell from a high of 6.0% to 4.0%. During the same period, the net NPA position of these NPAs also fell from 2.0% to 1.1%, showing that substantial chunk of these bad loans are also provided for. Finally, if you look at the provision coverage ratio (PCR) over an 18-month perspective, then the PCR has improved from 68% to around 72%.


Even as the gross and net NPA levels of the NBFCs tapered, there was also a gradual improvement in the profitability of the NBFCs in H2FY24. The cost to income (C/I) ratio had been steadily falling from 52% to 43% September 2022 and September 2023. In the latest half year to March 2024, the cost to income ratio has gone up marginally to 43.3%, due to a rise in the operating costs. The net interest margin (NIMs) had been steadily rising till September 2023, However, between September 2023 and March 2024, the ratios has slightly dipped from 4.7% to 4.5%. This could be attributed to the fact that NBFCs are now forced to pay higher rate of interest on deposits in sync with repo rates being at 6.5%.

It must be remembered here that while NBFCs earn higher yields on their loans given compared to the banks, but they do not have the benefit of low cost CASA deposits which banks enjoy. Despite that, they have managed to maintain the NIMs at sharply higher levels; although these margins tend to be quite volatile at times The return on assets (ROA), a critical measure for financial companies, has remained stable between 2.7% about 3 quarters back, but has now edged up to 3.3%, largely due to the rapid growth in the profitability of these NBFCs. To sum up, while the NIMs did see some pressure in the latest quarter, the ROA continues to be very robust for NBFCs.

Capital adequacy position of NBFCs as of H1FY24

During the March 2023 quarter, the NBFCs maintained high capital adequacy ratio on the back of robust profits and requisite capital raising done by the NBFCs. Over the last one year, the capital adequacy has been stable around 27.6%, which is well above the statutory minimum requirement of 15%. For the period to April 2024, the CRAR did taper a bit to 26.6% due to the rapidly growing loan book. However, it continues to be extremely comfortable and nearly 1000 bps above the minimum statutory requirement. That leaves the NBFCs with a lot of room to grow their asset books from the current levels.

While capital adequacy is one way of looking at the quality of the balance sheet, there are other measures too. One such measure is the ratio of short term liabilities to total assets. For instance, for the NBFCs as a whole, the short term liabilities as a share of total assets stands 23.5% as of April 2024; lower than 24.3% recorded in September 2023. At the same time, the long term assets as a percentage of total assets stands at a healthy 64.8%, just about 40 bps lower than the 65.2% in H1FY24. These ratios have been stable over the last 3 sequential periods.

What the FSR says about Insurance sector and Mutual Funds

While the insurers and mutual funds are not strictly lending NBFCs, they do form an important part of the financial system in terms of their AUM and the risk metrics as well as in their strong retail reach. If you look at the AUM of Indian mutual funds at close to $700 Billion with over 18.5 Crore folios, then it is huge. On the insurance front, LIC alone is bigger than that. Let us focus on insurance first. In terms of solvency ratio for life insurance companies, LIC has consistently held the solvency ratio in the range of 185% to 190% while private life insurers overall have maintained solvency ratio above 220%. The threshold prescribed by IRDA is 150%, so both are above the mark, although the position is a lot more comfortable in the case of the private life insurance companies. For the industry as a whole, the average solvency ratio is stable at around 198. However, in the case of the non-life insurance companies, the situation is slightly different. Here, private non-life insurers have comfortable solvency ratio of above 223% while it is sub-optimal (under 100) for the PSU general insurance companies in India; actually, at just about 39%. The stand alone health insurers and the specialized insurers have a solvency ratio that is lot more comfortable, but they are very marginal players in the overall insurance game.

What does the FSR say about mutual funds in India? In terms of the 44 AMCs that underwent stress test, 32 AMCs showed stress levels that were well under the threshold, while 12 mutual funds showed risk levels that were above the threshold. The numbers has come down sharply from 17 mutual funds to just 12 mutual funds in the last 6 months, which means the risk monitoring is working. These are the debt fund schemes that are stress tested for interest rate risk, credit risk and default risk. If we look at in AUM instead of the number of AMCs, then out of the 301 schemes with AUM of ₹15.06 Trillion, a total of 273 schemes with total AUM of ₹13.30 Trillion are well under the risk threshold. These are cases where the stress is under control. However, in the case of 28 schemes with AUM of ₹1.76 Trillion, the stress is well above the threshold levels. That is the area of focus that the mutual funds have to really worry about. This the total debt fund corpus that is vulnerable to a plethora of risks; including credit risk, liquidity risk and interest rate risk.

Overall, the risk and stress situation appear to be under control as far as the NBFCs are concerned. One concern may be that with the slowing of the consumer loans portfolio, the GNPAs could go up while the NIMs may be under pressure. We have to wait and watch!

Related Tags

  • FinancialStabilityReport
  • FSR
  • GrossNPAs
  • NBFC
  • NetNPAs
  • NII
  • NIM
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