In a recent article published in the September 2024 edition of the RBI Bulletin, Reserve Bank of India (RBI) officials lauded the resilience of India’s Non-Banking Financial Companies (NBFC) sector, highlighting improved asset quality and diversification of funding sources. The article, titled Peeling the Layers: A Review of the NBFC Sector in Recent Times, reviewed the sector’s progress under the Scale-Based Regulations (SBR) framework introduced in October 2022.
According to the RBI, by the end of December 2023, the NBFC sector achieved double-digit credit growth, maintained adequate capital levels, and saw a significant reduction in delinquency ratios, underscoring its strong financial health. The sector’s gross non-performing asset (GNPA) ratio has shown remarkable improvement, dropping from a range of 4.4% for government-owned NBFCs and 10.6% for non-government NBFCs in December 2021, to 2.4% and 6.3% respectively by December 2023.
“While the GNPA ratio of upper-layer NBFCs is lower than that of middle-layer NBFCs, the latter have maintained adequate provisions for their riskier loan portfolios, bringing their net NPA (NNPA) ratio below that of upper-layer NBFCs,” the authors stated.
The article noted that the introduction of the SBR framework in 2022 has led to improved performance metrics for NBFCs, with rising profitability reflected in improved Return on Assets (RoA) and Return on Equity (RoE). The sector’s strategic diversification of funding sources has also reduced its dependence on bank borrowings, contributing to its overall financial stability.
Additionally, the extension of the Prompt Corrective Action (PCA) framework to government-owned NBFCs from October 2024 is expected to further strengthen financial discipline and risk management within the sector. “With adequate capital and low NNPA at the end of December 2023, these NBFCs are comfortably placed under the PCA framework,” the article noted.
NBFCs have experienced robust growth in secured retail credit, particularly in gold loans, vehicle loans, and housing loans. Expansion continues in the industrial and service sectors, signaling a broad-based credit growth trajectory.
However, RBI officials cautioned the sector to remain vigilant against emerging challenges, particularly in areas like cybersecurity and climate risk. They stressed the importance of enhancing risk management, compliance, and internal audit functions to safeguard the NBFCs’ sustainability.
As the NBFC sector plays an increasingly significant role in India’s financial landscape, it is imperative for these entities to proactively address evolving risks and maintain a robust assurance framework to ensure long-term growth, the article concluded.
