India’s Non-Banking Financial Companies (NBFCs) are facing increasing challenges as tightening liquidity conditions intensify margin pressures and restrict access to credit, especially for smaller and mid-sized players. This was the sentiment echoed by the panellists from India’s top NBFCs at the CNBC TV-18 Banking Transformation Summit.

The experts suggested that while the larger NBFCs have maintained their credit lines, the smaller entities are finding it increasingly difficult to secure funding at reasonable costs, raising concerns about their sustainability in the long term.

Jairam Sridharan, Managing Director of Piramal Capital & Housing Finance, highlighted the mounting margin pressures due to the liquidity crunch. He pointed out that the scarcity of deposits is driving up the cost of funds across the system, which will be more evident in the upcoming quarterly results. “The deposit crunch leads to margin pressures across the system,” Sridharan noted, adding that smaller NBFCs, in particular, are struggling with the rising cost of credit. With limited bargaining power, these smaller players are often forced to accept less favourable terms. “Banks are saying, ‘This is the price you either take it or walk.’ Smaller NBFCs don’t have much room to negotiate,” he explained.

The challenges are even more pronounced for NBFCs with credit ratings below AA, as Aseem Dhru, MD & CEO of SBFC Finance, pointed out. These companies are often excluded from key funding avenues like the bond market and must rely heavily on bank loans, where conditions have become increasingly stringent. “For a AA rated company, the number of instruments available becomes fewer, and you get more dependent on banks,” Dhru said. This growing reliance on bank credit increases the vulnerability of these companies to any further tightening in lending standards.

Adding to the woes, Y.S. Chakravarti, Managing Director and CEO of Shriram Finance, observed a noticeable stress in the urban market, particularly among smaller and micro businesses. While rural and semi-urban markets are performing relatively well, the urban segment, especially SMEs, is under significant pressure. “We’ve seen a little stress in SMEs, particularly small and micro businesses in the urban environment,” Chakravarti noted. This urban stress could worsen asset quality issues for NBFCs with significant exposure to these segments, making it crucial for them to manage their portfolios carefully.

Moreover, rising leverage among borrowers, particularly in the unsecured lending segment, is another growing concern. Sridharan highlighted a worrying trend where a significant portion of applicants for unsecured credit are juggling multiple loans. “Of all the applicants for credit, 10% have more than 10 live unsecured loans. This is not normal,” he said, emphasizing that while delinquency rates have not yet spiked dramatically, the high leverage is a potential risk that the sector must monitor closely.

Despite these immediate challenges, there is cautious optimism about the long-term prospects of the NBFC sector. Sridharan expressed hope that margin pressures might start easing after the second quarter, depending on policy developments and liquidity conditions. However, he also acknowledged that “the best in terms of asset quality is almost certainly behind us,” signalling that NBFCs will need to brace for more challenging times ahead.

As the sector navigates these pressures, the ability to diversify funding sources and maintain access to affordable credit will be critical for sustaining growth. With liquidity remaining tight, particularly for smaller players, the path forward for NBFCs will require strategic management of costs and risks, the panel suggested.