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RBI Flags Growing Risks in Bank-NBFC Loan Acquisitions
The Reserve Bank of India (RBI) has issued a significant warning regarding the increasing interlinkages between banks and non-banking finance companies (NBFCs), particularly concerning banks' acquisition of NBFC-originated loans. According to the RBI's latest Financial Stability Report, this trend, driven by banks' desire to expand their retail portfolios and earn higher yields, is creating concentration risks and the potential for amplified financial stress.
The Core Issue: Scaling Up Retail Portfolios
Banks are actively purchasing loans that were initially originated by NBFCs. The primary motivations include scaling up their retail lending operations, achieving higher interest yields, and meeting priority-sector lending targets mandated by the central bank. This strategy allows banks to grow their loan books without necessarily bearing the entire origination burden.
Financial Implications of Acquired Loans
The report points to a concerning trend in the credit performance of these acquired loan pools. Public sector banks, in particular, have experienced weaker credit performance compared to loans they originated themselves. Pools acquired through direct assignment and co-lending arrangements have shown higher loan losses. In contrast, private sector banks have generally managed to acquire loan pools that have performed better, suggesting potential differences in risk assessment and underwriting strategies between the two bank types.
NBFC Sector Stability Indicators
While the report flags risks in bank-NBFC interlinkages, it notes that the overall risk in the NBFC sector, as measured by the non-banking stability indicator (NBSI), saw an increase in September 2025 compared to the previous year. However, this indicator remained below its long-term average and was steady compared to March 2025, partly due to improvements in asset quality and liquidity within the NBFC sector itself.
Evolving Bank-NBFC Interlinkages
The relationship between banks and NBFCs has moved beyond simple lending and borrowing. NBFCs are increasingly selling or securitizing their retail and MSME loan portfolios. Banks are not only providing credit lines to NBFCs but are also actively acquiring these NBFC-originated assets through various methods, including direct loan transfers and securitization. This includes structures like direct assignment, pass-through certificates, and co-lending arrangements, deepening the financial ties.
Asset Quality Trends in Transferred Loans
Asset quality, measured by Gross Non-Performing Asset (GNPA) ratios, has shown steady improvement for transferred loan pools under direct assignment for both public and private sector banks. Private banks consistently exhibit lower stress levels in these pools, indicating superior underwriting and monitoring capabilities. At the end of September 2025, the GNPA ratio for public sector banks in direct assignments was 7.7 per cent, a slight decrease from 7.8 per cent in March 2025. For private banks, this ratio stood at 1.5 per cent in September 2025, slightly up from 1.4 per cent in March 2025.
Co-Lending Portfolios Show Higher Stress
Asset quality within co-lending portfolios generally shows higher GNPA ratios than direct assignments, especially for public sector banks. This suggests a relatively greater risk inherent in these jointly originated portfolios. Nevertheless, asset quality within co-lending improved by September 2025, indicating a stabilization as the frameworks mature. Public sector banks reported a GNPA ratio of 5.7 per cent, while private banks reported 2 per cent in these co-lending arrangements by September 2025.
Concentration Risks in Exposures
A significant concern highlighted is the high concentration of banks' exposure to NBFC originators. Data reveals that a small number of top NBFCs account for a substantial majority of exposures across direct assignment, co-lending, and pass-through certificates. By September 2025, concentration in co-lending reached approximately 85 per cent, underscoring a heavy reliance on a limited set of large NBFC partners. Concentration in direct assignment and pass-through certificates, while easing modestly, remains elevated in the mid-70 per cent range.
Overall Bank Exposure to NBFCs
Banks' total exposure to NBFCs has remained relatively stable. Direct lending to NBFCs constituted about 5.3 per cent of banks' total assets in September 2025. However, exposure through NBFC-originated loan transfers and securitization has seen a gradual increase, rising from around 0.6 per cent in September 2022 to approximately 0.9 per cent by September 2025. This steady rise signifies deepening interlinkages through risk-sharing structures.
Impact
This news indicates potential increased credit risk within the banking sector, which could lead to tighter lending standards or higher capital requirements for banks and NBFCs involved in these arrangements. Investors may become more cautious about financial sector stocks, particularly those heavily reliant on these interbank-NBFC loan acquisition models. Regulators may also consider stricter guidelines.
Impact rating: 7/10
Difficult Terms Explained
- Non-Banking Finance Company (NBFC): A financial institution that provides banking-like services but does not hold a full banking license. They offer loans, credit facilities, and other financial services but are regulated differently than traditional banks.
- Financial Stability Report (FSR): A biannual publication by the Reserve Bank of India that assesses the health and stability of the country's financial system.
- Retail Portfolios: Collections of loans made to individual consumers for personal use, such as home loans, auto loans, and personal loans.
- Priority-Sector Targets: Lending targets set by the RBI for banks to lend to specific sectors deemed important for the country's economic development, such as agriculture, small businesses, and housing.
- Direct Assignment: A method where an NBFC sells its loan portfolio directly to a bank without involving a special purpose vehicle or securitization structure.
- Co-Lending: A model where a bank and an NBFC collaborate to originate and fund loans. Both entities share the credit risk and revenue based on a pre-agreed ratio.
- Securitisation: A process where illiquid assets, like loan portfolios, are pooled together and transformed into marketable securities that can be sold to investors.
- Pass-Through Certificates (PTCs): Securities created through securitization, representing a claim on the cash flows generated by the underlying pool of assets (loans).
- Non-Banking Stability Indicator (NBSI): A composite index developed by the RBI to assess the stability of the NBFC sector.
- Gross Non-Performing Asset (GNPA) Ratio: The ratio of gross non-performing assets to total loans. GNPA refers to loans on which interest or principal repayment has remained overdue for a specified period (usually 90 days).