When bank loans get more costly, NBFCs borrow more money through bonds.

Since the Reserve Bank of India (RBI) implemented risk weight guidelines late last year, non-banking financial firms (NBFCs) have been borrowing more money through corporate bonds and other instruments at a faster rate. This is because bank loans have become more expensive. Alok Singh, group head of treasury at CSB Bank, stated, "Regulatory changes have had a significant impact on NBFC funding, which is the reason they had to resort to raising funds through other means." According to data collated from the BSE and NSE websites, NBFCs raised Rs 88,340 crore in corporate bonds during the July-September quarter, up from Rs 84,135 crore in April-June. On November 16, 2023, the central bank increased risk weights on unsecured consumer credit and bank loans to NBFCs to prevent any potential risk accumulation in these areas. Since the Reserve Bank of India (RBI) implemented risk weight guidelines in late 2022, non-banking financial companies (NBFCs) have increasingly turned to corporate bonds and other instruments to meet their borrowing needs. These regulatory changes have made bank loans more expensive, prompting NBFCs to explore alternate sources of funding. Corporate bonds, with their relatively lower cost of borrowing, have become a preferred option for these financial institutions looking to maintain liquidity and continue their lending operations without incurring higher costs from traditional bank loans. Alok Singh, the group head of treasury at CSB Bank, remarked that the regulatory changes significantly impacted NBFC funding structures. He explained that the increased cost of bank loans, due to the RBI's decision to raise risk weights on unsecured consumer credit and loans to NBFCs, has forced these companies to look for alternative avenues. The result is a marked shift toward bond markets and other debt instruments, enabling NBFCs to raise funds more efficiently. According to Singh, this trend is likely to continue as long as the regulatory environment remains tight and bank loan costs stay high. Data from the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) reflects this shift in borrowing patterns. During the July-September quarter of 2023, NBFCs raised Rs 88,340 crore through corporate bonds, up from Rs 84,135 crore in the previous quarter. This sharp increase highlights the growing importance of bond markets for NBFCs, particularly as they seek to avoid the higher costs associated with bank loans. By issuing bonds, NBFCs can secure long-term funding at fixed interest rates, providing them with more predictable cash flows and better financial stability. The RBI's decision to increase risk weights on unsecured consumer credit and loans to NBFCs, effective from November 16, 2023, was intended to mitigate the risks of excessive lending in these sectors. By increasing the capital requirements for such loans, the central bank aimed to prevent risk accumulation that could lead to financial instability. However, the policy also made borrowing more expensive for NBFCs, especially those heavily reliant on bank loans. As a result, the shift toward bonds is not just a short-term adjustment but a strategic move to adapt to the evolving regulatory landscape.