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, said Reserve Bank of India (RBI) officials.

And at the end of December 2023, the sector maintained double-digit credit growth, adequate capital levels, and a low delinquency ratio, the RBI officials said in an article ‘Peeling the Layers: A Review of the NBFC Sector in Recent Times,’ published in the September 2024 edition of the RBI Bulletin.

Since the introduction of SBR in October 2022, the performance metrics for NBFCs have shown significant positive trends. The asset qualities have improved as per the article. 

“While the gross NPA (GNPA) ratio of upper layer NBFCs is lower than that of middle layer, the latter maintained adequate provisions to account for their riskier loan portfolio, thereby bringing their net NPA (NNPA) ratio below that of NBFCs-UL,” the authors said.

The gross non-performing asset (NPA) ratio has decreased significantly, falling from a range of 4.4% for [Govt. NBFCs] and 10.6% for [Non- Govt NBFC] in December 2021 to 2.4% for [Govt. NBFCs] and 6.3% for [Non- Govt NBFC] by December 2023, reflecting improved asset quality and risk management within the sector.

As per the article, there has been a consistent rise in profitability, evidenced by improved return on assets (RoA) and return on equity (RoE). As of December 2023, NBFCs have demonstrated robust credit growth, adequate capital, and low delinquency ratios, signaling a resilient financial landscape.

Moreover, the extension of prompt corrective action (PCA) norms to government-owned NBFCs is expected to fortify the sector further. These regulations aim to enhance financial discipline and risk management.

“Under the PCA framework, capital and asset quality are the key areas for monitoring the health of NBFCs, and will become applicable for government-owned NBFCs from October 1, 2024. With adequate capital and low NNPA at end-December 2023, these NBFCs are comfortably placed,” the authors said.

In light of rising risk weights on bank lending, NBFCs are increasingly diversifying their funding sources to reduce dependence on bank borrowings. This strategic shift is crucial for maintaining financial stability. The article also highlights robust growth in secured retail credit, particularly in gold loans, vehicle loans, and housing loans, alongside continued expansion in the industrial and service sectors.

Going forward, NBFCs need to remain mindful of the rapidly evolving financial landscape and the emerging risks and challenges, especially in the domains of cyber-security and climate risk, the authors have cautioned.

”The assurance functions namely, risk management, compliance and internal audit, play a crucial role in maintaining the robustness and resilience of both the financial entity and the overall financial system,” they said.  

In light of their growing role in the Indian financial system, it is incumbent upon NBFCs to proactively identify and manage risks and bolster their assurance functions to ensure that the NBFC sector maintains a sustainable growth trajectory, they added.

The RBI has identified several major NBFCs as part of the upper layer under the SBR framework. These include LIC Housing Finance, Bajaj Finance, Shriram Finance, Tata Sons, L&T Finance, Indiabulls Housing Finance, Piramal Capital & Housing Finance, Cholamandalam Investment and Finance, Mahindra & Mahindra Financial Services, PNB Housing Finance, Tata Capital Financial Services, Aditya Birla Finance, HDB Financial Services, Muthoot Finance, and Bajaj Housing Finance.

As of now, except for Tata Sons, all companies in the upper layer list, including Bajaj Housing Finance, Aditya Birla Finance, L&T Finance and even Tata Capital, have complied or initiated steps to comply with the listing requirement, the officials said.

Tata Sons, in its annual report, has mentioned that it has voluntarily surrendered its certificate of registration to the RBI.