By Saloni Shukla
Copyright indiatimes
Mumbai: Five months after the Reserve Bank of India (RBI) restored risk weights on bank loans to non-banking financial companies (NBFCs) to 100%, banks remain cautious toward the sector.RBI data up to July shows lending to NBFCs grew just 2.6% in the first four months of FY26, compared with 12.7% a year earlier.Experts said lenders continue to avoid smaller NBFCs with large exposures to microfinance and unsecured loans, even as top-rated NBFC players tap overseas markets for cheaper funds due to slower transmission in MCLR loans, or loans offered at the lowest lending rate.”As banks focus on managing NIMs (net interest margins), they may drop some low-yield NBFC exposures at the margin, which could impact their overall sector exposure,” said Sanjay Agarwal, senior director at CareEdge Ratings. “Banks continue to exercise caution toward smaller NBFCs and those with significant exposures to MFIs and unsecured personal loans.”For over a year, credit flows to NBFCs have trailed overall bank credit growth, weighed down by regulatory tightening and a high base. The share of NBFCs in total bank credit fell to 8.5% in July 2025 from 9.1% a year earlier. Outstanding credit to the sector stood at ₹15.7 lakh crore at the end of July 2025, versus ₹15.3 lakh crore a year ago.Live EventsIn November 2023, the RBI had raised the risk weight on NBFC loans to 125% to discourage lending to NBFCs and microfinance companies amid a sharp 22% jump in unsecured loans. In February this year, the central bank eased rules by restoring the risk weight back to 100%.The NBFC segment has also seen moderation in bank credit flow due to a deliberate shift by larger players toward capital markets and offshore borrowings for cheaper, diversified funding.”As larger NBFCs look to expand their funding base, they are raising humongous amounts from international markets and capital markets,” said Prakash Agarwal, partner at consulting firm Gefion Capital. “For smaller NBFCs with weaker ratings, it’s very difficult to raise bank funds. Housing finance companies that rely heavily on bank borrowing are also seeing slower growth. So, this low credit growth is a mix of many factors,” he said.External commercial borrowings (ECBs) have emerged as a key funding source. In FY25, ECB registrations hit a record $61 billion, with NBFCs accounting for 43%, up from a 20-37% average over the past five years, RBI data shows. ECBs have helped NBFCs cut borrowing costs and diversify their funding mix.Add as a Reliable and Trusted News Source Add Now!
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