Learn what the RBI’s September Bulletin says about the NBFCs and their performance from December 2020 to December 2022.
Key Takeaways
- The NBFC sector grew in double digits from December 2020 to December 2022.
- NBFC-UL largely relied on secured borrowings from banks as compared to NBFC-ML.
- Loans and advances are the largest assets in the balance sheets of the Non-Banking Financial Companies.
- Mutual Funds have become the largest buyers of CPs issued by sector.
The RBI recently released its September Bulletin containing an insightful study on the performance of NBFCs in India from December 2020 to December 2022.
The study found that the balance sheet size of NBFCs grew faster in 2021 than in 2022. However, on the brighter side, the growth in the balance sheet of the sector was in double digits.
The report mentioned the role of low-interest rates prevailing at the time which led to an increase in the reliance of NBFCs on banks for borrowing. The trend was sharper in the case of companies functioning in the Upper Layer tier, ie. NBFC-UL with around half of their borrowings through banks.
Apart from directly borrowing from the banks, NBFCs also issued debentures and Commercial Papers (CPs), which again attracted banks as investors.
Analysing the trends of borrowing by the sector, the report found that companies in the upper layer majorly relied on secured borrowings, while companies functioning in the middle layer (NBFC-ML) relied more on unsecured borrowings.
On the asset side of the balance sheet of the NBFC sector, the study reveals that loans and advances were the largest components with 76 per cent and 14 per cent in the asset-size of the composite balance sheet.
The growth in aggregate loans and advances by NBFCs was 13.8 per cent during the study period, with a higher growth recorded in 2022 as compared to 2021.
The report found that the loans provided by NBFCs were mostly secured with a long tenor.
In terms of profitability, the study reveals that the companies in the upper layer performed better than the ones in the middle layer with a reduction in NPAs recorded in both layers.
The report also makes a special mention of the IL&FS crisis that led to an outflow of liquidity from the NBFC sector. Mutual Funds that were active participants in the CP market before the crisis had reduced their exposure to the NBFC sector out of panic. The trend has reversed now with Mutual Funds becoming the largest subscribers of CPs issued by the sector.
What are the layers in NBFCs?
The RBI has propounded a regulatory framework for NBFCs in 2021, dividing them into 4 layers or tiers based upon the regulatory intervention required.
There are 4 tiers in the NBFC framework- The Base Layer, the Middle Layer, the Upper Layer, and the Top Layer.
While the base layer requires the least regulatory intervention and includes small companies, the companies functioning in the Upper Layer require stricter norms and are generally treated similar to banks due to the potential of systematic spill-overs.
The Top Layer is usually kept empty, and any non-banking financial company in the Upper Layer growing large enough to pose a risk to the financial system could be shifted to the Top Layer with a customised regulatory structure for that institution.
