According to the latest Financial Stability Report from the Reserve Bank of India (RBI), assessing systemic risks within non-banking financial companies (NBFCs) poses a notable challenge due to the diverse nature of this segment.

A significant portion of the NBFC segment’s advances—approximately 95%—is attributed to NBFC-investment and credit companies (NBFC-ICCs) and NBFC infrastructure finance companies (NBFC-IFCs). The RBI highlights that these two categories exhibit differing risk profiles. While NBFC-ICCs predominantly engage in retail lending, NBFC-IFCs primarily cater to the industrial sector.

Between September 2021 and September 2023, retail lending by NBFCs exhibited a compound annual growth rate of 25.2%, surpassing the 15.7% rise in gross credit. As of September 2023, NBFC-ICCs accounted for 90.1% of total retail credit, while microfinance-focused NBFCs comprised the remaining 9.9%.

The report emphasizes that consumer loans accounted for a substantial portion—44.7%—of the incremental retail loan growth over the past year. Within the NBFC sector, unsecured loans escalated from 24.6% (March 2020) to 31.9% (September 2023).

Recently, the RBI heightened risk weights on both bank and NBFC exposure to consumer credit, likely impacting disbursements in this sector.

In contrast, NBFC-IFCs held a significant share (75.1%) of gross industrial credit within the NBFC sector, with the top ten sectors commanding 83% of their substantial loans. Notably, NBFC-IFCs exhibit sensitivity to developments in the power sector, which constitutes a substantial portion of their major exposures.

The report underscores concerns about substantial overdue payments from power distribution companies, potentially exacerbating stress within the electricity sector. Additionally, the report highlights the significant reliance of these NBFCs on bank borrowings, with such borrowings accounting for 41.1% of their total borrowings.

Furthermore, the report underscores a growing interconnection between banks and NBFCs via funding routes, posing idiosyncratic risks across various types of NBFCs, which could amplify contagion risks for banks.

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