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NBFCs need to diversify funding sources

September 20, 2023

NBFCs need to diversify funding sources
Non-banking financial companies (NBFCs) need to diversify funding sources and reduce excessive reliance on banks as they pursue steady growth in loan book with robust asset quality and capital position, according to a Reserve Bank of India (RBI) study.

NBFCs have been grouped into four categories base, middle, upper and top. This is based on their size, activity and perceived level of risk in terms of scale-based regulatory framework, which took effect from October 1, 2022.
 
NBFCs’ reliance on banks increased, particularly for NBFCs in the upper layer (NBFCs-UL), whose direct bank borrowings have grown steadily. They accounted for nearly half of their total borrowings at the end of December 2022.
 
Their reliance on banks steadily went up due to the low interest environment and lags in monetary policy transmission, according to study that appeared in Reserve Bank of India’s September 2023 bulletin. 
 
Their reliance on banks steadily went up due to the low interest environment and lags in monetary policy transmission.
 
While NBFC-ULs overwhelmingly rely on secured borrowings, NBFC-middle layers (MLs) borrow significantly via unsecured means. This is particularly true for big, government NBFCs, over two thirds of whose borrowings are unsecured.
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