According to rating agency ICRA, bank direct lending to non-banking finance firms (NBFCs) in the nation is anticipated to be between Rs 1.7 and Rs 1.9 trillion in the next financial year (FY25) due to elevated risk weights and exposure over sectoral limitations. NBFCs received an additional Rs 1.61 trillion in direct bank loans during the first ten months of the current fiscal year (FY24).

According to ICRA, bank lending to the NBFC industry has slowed down recently. Banks would face greater pressure in the future to increase the percentage of their exposure to the industry. This would be against the backdrop of their internal sectoral limitations as well as the Reserve Bank of India's recent hike in risk weights for bank exposures to NBFCs.

When risk weight fell below 100% in November 2023, the RBI increased it by 25%, indicating that the regulator was concerned about the rapid increase in bank lending to NBFCs.

Data from the RBI shows that as of January 2024, there were Rs 15.03 trillion in outstanding bank loans to NBFCs. In FY23, the bank lent Rs 3.08 trillion to fund businesses. In FY22, it was somewhat less, at Rs 73,831 crore.

The sector's entire base case incremental funding requirements (Rs 5.3-5.5 trillion) in FY25 would be approximately 33% of the expected Rs 1.7-1.9 trillion in additional direct bank lending for FY25. According to ICRA, this goes against fulfilling 38% of the additional funding requirements for FY24 through direct lending.

Within the banking group, private banks have increased their portion of total bank exposures to the NBFC industry during the last three to four years.

For the foreseeable future, at least, private banks' involvement will be impacted in a similar way by the tighter liquidity, more competition in the deposit mobilization market, and the need to enhance the credit-deposit (CD) ratio. If public sector banks do not increase their exposures, this might have a cascade effect on credit flow to financial enterprises, especially home financing companies.