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Informist, Monday, Jun. 30, 2025

--RBI report: NBFCs healthy, with capital buffers, improving asset quality

NEW DELHI – The capital-to-risk-weighted asset ratios of 10 non-banking financial companies from a sample size of 158 may fall below the regulatory minimum of 15% by March, according to the baseline scenario of a stress test of credit risk. The findings of the stress test were published in the June edition of the Financial Stability Report, released by the Reserve Bank of India on Monday.

The NBFCs are all in the middle layer of classification and have a share of 2.1% in the total share of advances among NBFCs. As a whole, the gross non-performing asset ratio of the sector may rise by 40 basis points on year to 3.3% by March. Their aggregate capital-to-risk-weighted asset ratio may fall to 21.4% by March 2026 from 23.4% in March this year, the report said.

The baseline scenario in the credit risk stress test takes into account business as usual over the next year. In the medium and severe risk scenario for credit risk, the RBI applied 1 standard deviation and 2 standard deviation shocks to the gross non-performing asset ratio, respectively. In the medium stress scenario, the capital capital-to-risk-weighted asset ratio declines by 80 bps, and by 100 bps in the severe scenario by March, compared to the baseline of 21.6%. Under the high-risk scenario, 15 middle-layer NBFCs representing 3.7% of all advances by the sector would have breached regulatory norms on minimum capital, the report said.

In addition to the credit risk, the RBI also assessed liquidity risk of NBFCs in a stress test. The liquidity stress tests across severities showed no non-bank lender would face a liquidity mismatch of over 50%. In the base case, only one NBFC had a negative cumulative liquidity mismatch of over 20% by March, taking into account expected cash flows over the financial year. Two other lenders would have smaller mismatches.

In a medium-risk scenario where inflows are down 5% and outflows up 5% from the base case, only two NBFCs have a liquidity mismatch of over 20%. Lenders representing 8.7% of the total asset size in the sample would in total would face mismatches. In a high-risk scenario where inflows are down 10% and outflows up 10%, three lenders would have significant liquidity mismatches of over 20%. However, 41 NBFCs of the 158, representing around 25% of the sector's advances, would face a liquidity mismatch.

NBFCs were healthy with sizable capital buffers, robust earnings and improving asset quality, the RBI said while summarising the report. Upper-layer NBFCs maintained a higher net interest margin of 8%, nearly double that of lenders classified under the middle-layer. Middle-layer NBFCs saw a fall in profitability due to microfinance sector stress in Oct-Mar. However, they were more vulnerable to liquidity stress, the report said.

As a snapshot of the broader sector, the report said delinquencies across both middle- and upper-layer NBFCs improved on the whole, with middle-layer lender maintaining a higher provision coverage ratio. The gross NPA ratio for the sector was 3.0%, while the capital-to-risk-weighted asset ratio was 25.8% in March. State-owned NBFCs, which comprised nearly 60% of the advances of the middle-layer, saw a fall in gross bad loans to 1.4%, while private companies had a gross NPA ratio of 5.2%, little changed from September.

Credit growth for NBFCs rose 20.7% on year by March-end from 16.0% a year ago. Upper-layer NBFCs drove the disbursement, with their loan book growing 40.8% on year. The pace of credit growth in infrastructure finance companies doubled on year to 19.4% by March.

"The surge in credit growth of NBFC-UL (upper-layer) was partly on account of conversion of a housing finance company (HFC) to an upper layer NBFC, and merger of a middle layer NBFC with an upper layer NBFC," the Financial Stability Report said.

The loan book of microfinance NBFCs fell 17.5% on year, especially in Oct-Mar, as lenders were cautious due to the stress in the portfolio, the report said. The recovery practices of microfinance companies have come under the scanner by state governments and the RBI, resulting in lower collection efficiencies and higher non-performing assets across the sector for both banks and NBFCs. Credit growth weakened across all major sectors excluding services and 'others' between October and March, the report said.

Meanwhile, NBFCs reduced their reliance on bank funding to 28.6% on total funding by March, from 29.0% a year ago. The report said this was due to higher risk weights on such lending. The RBI in November 2023 increased the weight on credit exposure of banks to non-banking finance companies by 25%, over and above the risk weight associated with the ratings of these NBFCs, which it only reversed in February. Upper-layer NBFCs still sourced over one-third of their funding requirements in March from banks, including direct borrowing, commercial papers and debentures subscribed by banks, the report said.  End

Reported by Aaryan Khanna

Edited by Ashish Shirke

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