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The Reserve Bank of India (RBI) has highlighted the need for Non-Banking Financial Companies (NBFCs) to diversify their sources of funding as a key risk mitigation strategy.
In its latest report, the RBI noted that while the dependency of NBFCs on banks has moderated slightly, it remains significantly high. It said "The dependence of NBFCs on banks remain high, notwithstanding some moderation; NBFCs need to further diversify their sources of funds as a risk mitigation strategy". The report emphasized that NBFCs must broaden their funding sources to reduce concentration risks. It also pointed out that the sector faces emerging challenges, including cybersecurity threats, evolving concentration risks, and climate-related financial risks associated with lending to certain industries. The RBI warned that an imprudent "growth at any cost" approach could be detrimental to the sector, urging NBFCs to implement robust risk management frameworks. "An imprudent 'growth at any cost' approach would be counter-productive, and a robust risk management framework should be implemented" said the report. Additionally, the central bank advised NBFCs to strengthen their customer grievance redressal mechanisms, adhere to fair practices, and avoid charging excessively high interest rates. Such measures, the report stated, are essential for ensuring the sector's relevance in a rapidly evolving financial landscape. Despite these concerns, the report highlighted positive trends in the NBFC sector during the financial year 2023-24. It noted that NBFCs experienced sustained double-digit growth in their balance sheets, reflecting the increasing importance of the sector in domestic credit intermediation. Housing Finance Companies (HFCs) also recorded double-digit credit growth, adjusted for recent mergers, while asset quality improved across various layers of the NBFC sector. The RBI recognized innovative strategies, such as the First Loss Default Guarantee (FLDG) framework and the co-lending model, as valuable tools for helping NBFCs expand their reach. The report also noted that the consolidated balance sheet of All India Financial Institutions (AIFIs) grew at a slightly higher pace in 2023-24. Public Depositories (PDs) exceeded their minimum bidding commitments and achieved the required annual turnover ratios during the year. The report underlined the dual focus for NBFCs: leveraging growth opportunities while ensuring financial stability through diversification, innovation, and strengthened risk management. (ANI)
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