NBFCs must improve credit quality and reduce risks, say experts

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26 Aug, 2025 12:21

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Even as the non-banking financial companies (NBFCs) are set to benefit with the central bank’s measures, they must step up on the credit risks taken on their books, industry experts say.

At a time when funding crisis is a growing concern for NBFCs, including housing finance companies (HFCs), investors have punished the finance sector with a nearly 10 percent fall on the BSE stock market over the past one month.

Experts believe that the sector must be prepared for tougher times ahead.

“The issue is about credit one and not liquidity. The move by RBI shows that it doesn't want NBFCs to suffer due to liquidity crisis. Of course, any lender would want to be sure on the quality of credit. The RBI circular gives a broader message that liquidity is not an issue,” said a senior executive of a large public sector bank.

On October 19, the Reserve Bank of India (RBI) announced measures to pump in funds into NBFCs with market borrowings getting costlier and banks reluctant to lend to the sector.

“During such times, market starts fearing for the worst. It happened in 2008, 2013 and now. There is no inherent worry… But if the liquidity crisis continues, smaller NBFCs may suffer. And hence, the steps taken by RBI will push banks to lend to the NBFCs and provide the liquidity comfort,” said Keki Mistry, Vice Chairman and Chief Executive Officer of Housing Development Finance Corporation (HDFC).

He further said, RBI’s action definitely helps to improve lending to NBFCs by banks and also removes the single party limit for large NBFCs and HFCs and hence will benefit larger players.

Bad credit in good times

Over the last few years, amid slowdown in bank credit, exposure of NBFCs to stressed sectors such as infrastructure and real estate has increased.

In a growing market, some NBFC players tend to overlook the quality of credit taking higher risks, the banker mentioned earlier said.

On October 10, credit rating downgrade by Brickwork for Supertech (a leading real estate developer based out of NCR) to “D” category due to payment delay by company, further fuelled concerns over exposures to such companies.

Fears around the rub-on effect of the current operating environment on stress for real estate financing segment grew on the HFCs having exposure to Supertech making banks and mutual funds further wary of increasing lending to such NBFCs.

Higher  borrowing costs

In the October 5 monetary policy announcement, the banking regulator said it would tighten norms for NBFCs to address the mismatch in their assets and liabilities

Rating agency Moody’s Investors Service believes that the liquidity tightness could lead to sharply higher financing costs or even difficulty in rolling over liabilities for NBFCs because they rely heavily on market borrowing to fund asset growth.

A senior SBI executive pointed out that if NBFCs are taking a higher credit risks, mutual funds do not subscribe to the bonds and hence the borrowing costs are going up.

Banks either do not want to take risks or charge a higher price for lending to the NBFCs for now.

Nervousness around the non-bank lenders has persisted since mid-September, despite attempts by the government and banks to calm the markets.

For now, the banking regulator has ensured that liquidity is comfortable at the system level and banks are further facilitated to lend.

Meanwhile, the National Housing Bank (NHB) and State Bank of India (SBI) have expressed to increase refinancing limit by Rs 6,000 crore and availability of additional funds of Rs 20,000-30,000 crore worth of funds to increase loan portfolio purchases from the NBFCs.

According to Moody’s, an additional point of stress is that a substantial amount of the market debt is short-term in nature and will need to be rolled over within a few months’ time.

At the end of March 2018, nearly 38 percent of the debt incurred by NBFCs required refinancing over a 12-month period.

“In addition, most of their short-term debt was owed to non-bank sources such as market borrowings, which we associate with a higher risk of not being rolled over compared with borrowings from banks,” the rating agency added.