The Non-Banking Financial Company (NBFC) sector in India has undergone a significant transformation, marked by a multi-year regulatory clean-up led by the Reserve Bank of India (RBI). This process, reminiscent of previous clean-ups in the power and construction sectors, has reshaped the NBFC landscape and created potential investment opportunities.

Background of the Clean-up

The regulatory overhaul began in the wake of troubles at Dewan Housing Finance Corporation Limited (DHFL), which culminated in a major scam and the company's eventual closure. This event served as a catalyst for stricter oversight and reform within the NBFC sector.

Impact of Regulatory Actions

The clean-up process has had far-reaching effects on the NBFC sector:

1. Market Forces at Work: The combination of regulatory actions and market dynamics has effectively weeded out weaker players in the sector.
2. Survival of the Fittest: Seven NBFC stocks have been identified as survivors of this rigorous clean-up process.
3. Investment Potential: These surviving NBFCs now present potential investment opportunities, with analysts suggesting upside potential of up to 29%.

Implications for Investors

The regulatory clean-up in the NBFC sector has important implications for investors:

1. Improved Sector Health: The removal of weaker players is likely to result in a more robust and stable NBFC sector.
2. Selective Opportunities: While the sector has faced challenges, the identified survivors may offer attractive investment prospects.
3. Due Diligence Crucial: Despite the potential upside, investors should conduct thorough research before making investment decisions in this sector.

Surviving NBFCs

While specific names were not provided in the original news, seven NBFC stocks have emerged as survivors of the regulatory clean-up. These companies have demonstrated resilience and adaptability in the face of increased scrutiny and market pressures.

Conclusion

The multi-year regulatory clean-up of the NBFC sector, initiated by the RBI, has led to a more streamlined and potentially healthier industry. While the process has been challenging for many players in the sector, it has also created opportunities for those NBFCs that have successfully navigated the regulatory landscape. Investors looking at the NBFC sector should consider these developments carefully, focusing on the companies that have demonstrated resilience and adaptability in this new regulatory environment.

The non-banking financial company (NBFC) sector in India continues to face challenges in securing bank funding, despite recent regulatory changes aimed at easing lending conditions. The Reserve Bank of India's (RBI) decision to restore risk weights on NBFC loans to 100% from 125% has not yet translated into increased lending from banks to NBFCs.

Sluggish Growth in Bank Lending to NBFCs

In the first four months of the current fiscal year, lending to NBFCs grew by a mere 2.60%, marking a significant decline from the 12.70% growth observed in the same period a year earlier. This slowdown indicates a persistent cautious approach by banks towards NBFC lending.

Declining Share of NBFCs in Bank Credit

The share of NBFCs in total bank credit has seen a noticeable decrease:

The outstanding credit to NBFCs stood at ₹15.70 lakh crore as of July.

Banks' Selective Approach

Banks are particularly cautious about smaller NBFCs, especially those with substantial exposures to:

1. Microfinance
2. Unsecured loans

This selective approach suggests a risk-averse strategy by banks in their lending practices towards NBFCs.

Alternative Funding Sources for Larger NBFCs

In response to the tightening bank credit, larger NBFCs are increasingly turning to alternative funding sources:

1. Capital markets
2. Offshore borrowings

These alternatives are being pursued for potentially cheaper funding options.

Surge in External Commercial Borrowings

External commercial borrowings (ECBs) have seen a significant uptick:

• Record $61.00 billion in ECBs
• NBFCs' share in ECBs: 43.00%

This represents a substantial increase from the 20-37% average observed over the past five years.

Implications for the NBFC Sector

The current scenario presents both challenges and opportunities for the NBFC sector:

1. Funding Diversification: Larger NBFCs are successfully tapping into diverse funding sources, potentially reducing their dependence on bank credit.
2. Pressure on Smaller NBFCs: Smaller NBFCs, particularly those in microfinance and unsecured lending, may face increased pressure due to limited access to bank funding.
3. Evolving Financial Landscape: The shift towards capital markets and offshore borrowings could lead to a more diverse and resilient funding structure for the NBFC sector as a whole.

As the situation continues to evolve, it remains to be seen how these trends will impact the overall health and growth of the NBFC sector in India.