Few NBFCs with low capital buffers growing at rapid pace warrants close monitoring: RBI report

Reserve Bank of India

The Reserve Bank of India’s (RBI) financial stability report on June 27 said few non-banking finance companies (NBFCs) having a low capital buffers are growing at a rapid pace, which warrants close monitoring.

“A few NBFCs with low capital buffers are growing at a rapid pace, warranting close monitoring from a systemic stability perspective as they could morph into a tail risk,” RBI said in a report.

Further, the report said the pace of growth of advances by NBFCs moderated during H2FY24, reflecting the impact of regulatory prescription of higher risk weights on NBFC lending to certain categories of consumer credit and bank lending to NBFCs.

On an incremental basis, bank lending to NBFCs declined in H2FY24 even as the latter’s overall cost of funds increased, the report added.

Overall, the NBFC sector maintained large capital buffers boosted by improving asset quality and robust earnings. Despite a 79 basis points (bps) decline during H2:2023-24, the capital ratio of NBFCs (CRAR of 26.6 per cent) remains well above the regulatory minimum of 15 per cent.

NBFCs NIMs have remained in the range of 4.2-4.8 per cent since mid-2022 which is well above the pre-pandemic trend, notwithstanding a fall of 27 bps to 4.5 per cent in March 2024.

The profitability improved further with the RoA at 3.3 per cent during Q4:2023-24, report said. The asset quality of NBFCs continued to improve
and the GNPA ratio reached a new low of 4.0 per cent.