Shift to Bank Funding Gains Pace

Non-Banking Financial Companies (NBFCs) are increasingly turning to bank loans, a significant move in their funding strategies for fiscal year 2027. This pivot stems from not just lower bank interest rates but also from shifting capital market conditions and global economic uncertainties that make other funding sources less appealing or riskier. Crisil Ratings forecasts this trend will boost bank borrowings to about 45% by the end of FY27, up from 43% in FY26. This adjustment shows the challenges NBFCs face in finding stable, cost-effective funding for growth.

Bank Loans Cheaper Than Bonds for NBFCs

In fiscal year 2026, NBFC funding saw a split between bank lending rates and capital markets. Bank lending rates consistently fell, while bond yields, after a dip, rose and stayed high into FY27, making bank loans more cost-effective. Banks' average lending rate dropped by roughly 0.90% in FY26, mostly in the second half. Meanwhile, NBFC bond issuances dropped sharply from ₹2.1 lakh crore in the first half of FY26 to ₹1.4 lakh crore in the second. This price difference heavily favors bank loans for NBFCs. Although total NBFC borrowings are projected to grow 13% annually to $750 billion by FY27, market instruments are expected to make up 64% of total debt (up from 43% in FY24). However, bank credit remains essential for immediate needs.

Geopolitics Curb ECBs, Securitisation Surges

External Commercial Borrowings (ECBs) are less attractive now. Growing geopolitical uncertainty and volatile exchange rates have significantly raised hedging costs for Indian borrowers. Offshore bond issuances by Indian companies dropped 43% to $4.9 billion in FY26 because higher hedging costs canceled out the benefits of foreign borrowing. As a result, NBFCs are increasingly using securitisation. India's securitisation market hit a record ₹2.55 lakh crore in FY26, largely due to NBFCs needing liquidity and balance sheet flexibility—a 9% yearly increase. This boom, with NBFC originations up 30%, shows the market's appeal, particularly for mid-sized firms. Gold loan-backed securitisation became the second-largest asset class last fiscal, even topping mortgages. Relying on securitisation provides crucial funding but also shows NBFCs are diversifying to avoid depending too heavily on one source.

Persistent Risks: Asset Quality and Funding Concerns

Despite strong growth forecasts for the NBFC sector—estimated at 15-17% for FY26 and 16-18% for FY27—significant risks remain. Asset quality concerns, especially in unsecured lending, are a key focus for rating agencies like S&P Global Ratings and Fitch Ratings. While overall delinquencies are expected to slightly worsen by 10-30 basis points in FY26, credit costs for unsecured loans are predicted to rise more than for secured loans, driven by borrowers being overleveraged. The past reliance on short-term wholesale funding proved unstable, as seen in previous liquidity crises. Although NBFCs are diversifying funding, relying more on bank loans, even at good rates, could create broader financial risks if not handled carefully. Research from the Reserve Bank of India (RBI) suggests that NBFCs don't always fully benefit from policy rate changes due to their higher funding costs and dependence on banks and markets. This means lower bank rates might not always lead to much cheaper overall funding. The sector's assets under management (AUM) are projected to exceed ₹50 lakh crore by March 2027.

Future Outlook and Regulatory Evolution

The NBFC sector's future growth depends on careful risk management and strong funding diversification. While borrowing more from banks offers immediate cost benefits, over-reliance risks concentrated funding problems. S&P Global Ratings has observed that stricter lending rules are slowing growth plans to manage risk. The RBI's recent steps to expand the term money market by letting non-bank entities, including NBFCs, participate aim to improve liquidity and market efficiency. Alongside efforts to strengthen capital reserves and adapt to new regulations, these actions will be vital for NBFCs to stay financially stable and benefit from India's economic growth, which the IMF forecasts at 6.5% for FY27.