Capital markets to remain attractive even as securitisation, FCB gaining traction
FinTech BizNews Service
Mumbai, September 30, 2024: Non-banking financial companies (NBFCs)1 are increasingly attempting to access funding sources beyond banks, such as non-convertible debentures (NCD), commercial papers (CP), foreign currency borrowings (FCB) and securitisation, to continue their growth march. This follows challenges in availability of bank loans as freely as in the past after risk weights on bank lending to higher-rated NBFCs were raised last year.
A study of 110+ NBFCs rated by CRISIL Ratings, accounting for >95% of the sector’s assets under management (AUM), indicates the share of bank loans2 in the sector’s borrowings declined ~60 basis points (bps) to 47.0% in the quarter through June 30, 2024. The drop is more for the ‘A and below’ category rated players compared with those in the ‘AAA’ and ‘AA’ categories (see chart 1 in annexure).
Says Malvika Bhotika, Director, CRISIL Ratings, “While banks will remain the dominant funding source for NBFCs, the bond market will gain market share over the near to medium term. In fact, the share of NCDs in the sector’s borrowings rose ~30 bps to 28.5% in June quarter, in line with the ‘AAA’ and ‘AA’ category rated entities. Those rated in the ‘A and below’ categories are attempting to tap the market too, as share of NCDs in their overall borrowings is up ~40 bps during the quarter, but on a much smaller base. We believe the bond market will become more attractive over the next few quarters given the expectation of a repo rate cut.”
Issuances by NBFCs will also be supported by improved investor confidence because of stronger balance sheets and healthy liquidity, with most maintaining liquidity coverage ratio way higher than the regulatory requirement.
Over the near to medium term, funding diversification across resource types will remain imperative for NBFCs to continue their growth trajectory. Diversification is also crucial to optimise borrowing cost, given bank funding has become dearer by 20-50 bps over the past few quarters. That means NBFCs will have to keep tapping other funding avenues, including CPs, FCBs and securitisation, which together accounted for 16.1% of the sector’s borrowings as of June 2024.
The momentum in CP issuances by NBFCs has picked up in recent quarters with overall volume reaching levels seen almost 5 years back. Outstanding investments by mutual funds, one of the largest investors in such CPs, touched a six-year high in July 2024. On the other hand, securitisation volume rose to Rs 1.9 lakh crore3 in fiscal 2024, a level last seen four years back.
Says Rounak Agarwal, Associate Director, CRISIL Ratings, “Securitisation will continue to be one of the preferred alternative routes of NBFCs to raise funds. Interestingly, NBFC issuers in the ‘A and below’ rating categories have been able to partially offset the decline in their share of bank borrowings through securitisation — the share of which rose ~30 bps in the June quarter. On the other hand, the ‘AAA’ and ‘AA’ categories rated issuers have relied more on FCBs, helped by lower hedging costs. To be sure, the share of FCBs in their overall borrowings rose ~50 bps to 5.3% during the period.”
