As RBI acts tough, NBFCs fear banks may turn wary of lending

Finance companies would moderate loan disbursals as they look to boost internal control systems after the banking regulator recently ordered curbs on two high-margin - but potentially risky - business lines: Gold loans and securities financing.

Such restrictions would make banks conservative while lending to non-bank financiers, which would leave the latter with insufficient liquidity for onward lending.

"Banks also believe that other finance companies may receive a similar diktat from the banking regulator, while some NBFCs are concerned that banks may not be very forthcoming in lending to them," said a senior bank official.


In such a scenario, a non-bank lender will slow down lending, maintain a liquidity buffer, and conserve capital, said a senior economist with a rating company.

This week, the Reserve Bank of India (RBI) banned IIFL Finance from giving gold loans; JM Financial Products has not been allowed to undertake financing of bonds and stock. Last month, the regulator barred Paytm Payments Bank from accepting deposits or top-ups, restricting it from conducting normal banking operations.

Equity broking firms also believe the RBI's moves will have temporary implications for credit expansion, although the benefits in the long run will outweigh short-term pains. "We believe these punitive actions will impact systemic growth for NBFCs in the near term, but will hopefully curb unethical business practices, avert systemic collapse as seen in the past," stock broking firm Emkay Global said.

"We believe that the list of financial penalties, and even of business embargos, is likely to scale up and should thus keep regulated entities and fintechs on edge," it added.

The sharp rise in bank lending to NBFC is also worrying regulators, which may get tempered with such regulatory action. "Bank funding to the NBFC sector has risen so sharply in the last five years that there is a genuine concern over the end use of funds and the impact it could have on the system," said Sanjay Agarwal, senior director at CareEdge Ratings.

Data compiled by CareEdge Ratings show that banks' lending to finance companies rose 3.8x from 5% in March 2017 to 9.6% in October 2023. The exposure rose from ₹3.8 lakh crore to ₹14.8 lakh crore during the same period. The top management of finance companies has directed its field staff to revisit the processes and ensure that they comply with the regulations, said a senior official of finance companies who did not want to be named.

In case of IIFL Finance, Canadian billionaire Prem Watsa-backed Fairfax promptly announced that it would provide a $200 million liquidity support to the company if it faces any funding crunch due to regulator's action. Fairfax has 15% stake in IIFL Finance.