Non-banking finance companies’ (NBFCs) unsecured consumer credit offtake is chugging along smoothly, clocking above industry growth, despite RBI, in November 2023, increasing the risk weights on such exposures as well as banks lending to them.

Now, with RBI, last month, re-calibrating the risk-weight on banks’ exposure to NBFCs, the latter’s lending to this segment is expected to remain supported at relatively lower interest rates, say industry experts.

Specifically, the risk weight on banks’ exposure to NBFCs, which was increased by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs was below 100 per cent, was restored to earlier levels.

So, banks are seen shedding their conservatism in lending to NBFCs after restoration of risk weights to the pre-November 2023 level.

According to a Nomura report, on a year-on-year (y-o-y) basis, NBFCs personal loans (PL) grew 37 per cent vs 16 per cent for the system (including NBFCs and Banks) in Q3 (October-December) FY25.

During FY22-FY25, NBFCs’ unsecured loans grew 2.6 times vs 1.8 times for the overall system, leading to market share gains in the system-level PL portfolio (24 per cent in Q3FY25 vs 22 per cent/17 per cent in FY24/FY22).

Nomura Research Analysts Parth Desai and Ankit Bihani opined that the recent rate cuts and liquidity infusion by the RBI should lower borrowing costs for NBFCs, enabling them to price loans more efficiently.

“With improving borrower profile, fiscal stimulus, loosening monetary stance and a more disciplined lending approach, the unsecured segment is positioned for better risk-adjusted growth, in our view.”

“While risk weights for this segment have not been reduced yet, incrementally improving trends in the sector could drive regulatory relaxations,” they said.

On November 16, 2023, the Reserve Bank increased the risk weights on unsecured consumer credit exposures of banks and NBFCs (including credit card receivables) as well as bank lending to NBFCs, other than housing finance companies (HFCs), by 25 percentage points.

The Nomura analysts’ assessed that system-disbursement ticket size in PL further fell to ₹58,000 in 1HFY24 (₹65,000 in FY24) with NBFCs’ disbursement ticket size being only ₹25,000 in 1HFY24 (₹5,75,000/ 3,70,000 for PSU/private banks).

Furthermore, the share of less than ₹50,000 PL disbursements (value) increased further in the mix to 10.5 per cent in 1HFY24 (vs 9.6 per cent in FY24) with contribution in volume terms being high at 84 per cent in 1HFY24.