The non-banking financial company (NBFC) sector in India has seen significant growth over the past decade, evolving from being considered a shadow of traditional banks to becoming a key player in the economy. NBFCs now contribute over 12.5% of the country’s GDP and play a crucial role in providing formal credit to MSMEs, retail sectors, and underserved populations.
One of the key factors driving the growth of NBFCs is their diverse funding sources, including bank loans, debentures, commercial papers, and other debt instruments. However, to ensure sustained growth and reduce dependence on banks, it is essential for NBFCs to diversify and deepen their funding sources. This includes establishing a more resilient financial framework and exploring new avenues for funding.
The Indian bond market plays a significant role in providing debt capital to NBFCs, accounting for nearly 36% of their funding. However, the investor base in the bond market remains narrow, with a concentration of large corporate treasuries, insurance companies, and retirement funds. To address this issue, industry stakeholders have proposed several recommendations, such as creating an on-tap issuance facility for non-convertible debentures (NCDs) and introducing buyback options for issuers to increase market liquidity and encourage retail participation.
Furthermore, there is a need to broaden funding opportunities for NBFCs by optimizing investment regulations for insurance and pension funds. Relaxing certain caps and expanding investment opportunities in corporate bonds and infrastructure projects could support broader economic growth while maintaining financial stability.
Additionally, tapping into foreign currency borrowing options, such as External Commercial Borrowings (ECBs) and Bonds, could offer a large pool of long-term funds for NBFCs. With international interest rates softening and lower hedging costs, there is a compelling case to expand foreign borrowing options to support the growth of NBFCs.
In conclusion, NBFCs play a crucial role in India’s financial inclusion and growth agenda. To scale sustainably, they need diversified funding sources, broader participation in the bond market, optimized frameworks for insurance and pension funds, and expanded foreign borrowing options. By building a robust funding base, NBFCs can drive inclusive and long-term economic progress in India.
