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The solution is to deepen India's bond markets to free the NBFCs from excessive dependence on banks, and make the occasional failures (IL&FS, DHFL) less traumatic for the banking system
India's NBFCs have grown their loan book at a rate of 18 per cent in the last five years, with the sector's contribution to total credit increasing from 15 per cent to 20 per cent in just three years. They play a pivotal role in meeting the financial needs of individuals and businesses that have traditionally remained underserved by banks.
While NBFCs are recognised as a distinct segment, their major source of funding even today is the banks. In FY2017, borrowings from banks made up 21.2 per cent of NBFC borrowings, which jumped to 23.6 per cent in FY2018 and 29.2 per cent in FY2019.
In recent years, this reliance on banks has come at the cost of inadequate funding, mainly due to deterioration in the credit profile of banks and the overall weakening of confidence in the sector following some high-profile defaults.
The solution is to deepen India's bond markets to free the NBFCs from excessive dependence on banks, and make the occasional failures (IL&FS, DHFL) less traumatic for the banking system. The development of an active and liquid corporate bond market can help greatly in the transparent and efficient financing of the businesses.