Funding Mix Changing For NBFCs With Focus On Short-Term Borrowing, Says India Ratings

Elevated interest rates and a conducive environment for growth have driven non-banking finance companies to resort to short-term borrowing routes such as commercial papers, reflecting a change in their funding mix, India Ratings and Research said in a report on Wednesday.

The reason why NBFCs are flocking towards the short-term debt market is because the CP curve has significantly steepened in recent months.

Yield on CPs for 0-45 days is around 7.1%, while that for 300 days and above is around 8%. This is in comparison to a 6.45% rate for 91-day Treasury-Bills and 6.55% for 364-day T-Bills.

What the rating agency finds encouraging is that this trend is taking place among high-rated NBFCs, whose papers are generally rated AAA and AA+.

“...High-rated entities are borrowing incrementally through short-tenor CPs as bank borrowing has become expensive in comparison to the rates palatable to capital market participants," Karan Gupta, head and director financial institutions at India Ratings said.

With the Reserve Bank of India highlighting the increasing exposure of banks to NBFCs, this shift to CP borrowing presents an opportunity to rebalance the scale but to a limited extent, he said.

While short-term borrowings by financial entities are always a risky proposition, especially for weak companies, India Ratings will continue to monitor this situation given the rise in their short-term borrowings by low-rated entities.

High-rated NBFCs have sufficient diversification in their funding profile to tap various funding avenues but it's difficult for lower-rated NBFCs as they rely on large NBFCs and development financial institutions and private banks, the ratings agency said.

Further, shifting focus on growing their franchisee in a capital-light manner through co-lending and business-corresponding arrangements is also noteworthy, India Rating said.

However, such partnerships also tread a cautious path if the underlying loan segment is showing some signs of weakness, it said.

In a nutshell, the funding mix for NBFCs, especially low-rated ones, is a key monitorable over the medium term, it added.