Growing external borrowings make NBFCs more vulnerable to rupee swings: RBI

RBI says NBFCs' higher foreign currency borrowing has helped steady funding costs, but it raises vulnerability to exchange rate volatility even with most exposure hedged

The Reserve Bank of India (RBI) has cautioned that increasing reliance of non-banking financial companies (NBFC) on external funding has made them susceptible to greater exchange rate volatility. 

 

While about 86 per cent of foreign currency borrowings are hedged, currency risks could partly erode the benefits of lower funding costs during periods of stress, RBI said.

 

“Easing money market rates and an increase in foreign currency borrowings have helped NBFCs steady the rise in the cost of funds. However, growing reliance on external funding has increased the NBFC sector’s susceptibility to exchange rate volatility,” the RBI said.

 

RBI also noted that although NBFCs’ gross non-performing asset (NPA) ratio has declined, fresh slippages and write-offs are rising, indicating a gradual build-up of stress in loan portfolios despite improved headline asset quality.

 

 

Data shows, although the growth of NBFCs’ borrowing from banks have moderated to 8.5 percent in September 2025, they remain the largest source of funding. The slowdown suggests both increased lender caution and NBFCs’ efforts to diversify funding away from bank borrowings.

 

NBFC’s borrowings from banks (including banks’ subscription to debentures and commercial papers) declined from 41.2 per cent in September 2024 to 32.3 per cent in September 2025.

 

Debentures (excluding the portion subscribed by banks) accounted for 14.3 per cent in September 2025, remaining broadly stable compared with the previous year. Inter-corporate borrowings formed a relatively small share at 3.5 per cent, while borrowings from financial institutions stood at 3.2 per cent.

 

Short-term market instruments remained limited in the funding mix. Commercial papers (excluding bank subscriptions) constituted 2.8 per cent, while subordinate debt accounted for 2.2 per cent. Borrowings from the government were minimal at 0.4 per cent, underscoring the predominantly market- and bank-driven funding structure of NBFCs.

 

Gross NPA ratios in NBFCs have improved the combination of elevated slippages and rising write-offs emphasised underlying stress, particularly in microfinance and unsecured portfolios. The trends indicate that improved headline asset quality is partly driven by aggressive write-offs, reinforcing the RBI’s caution on closely monitoring credit quality and provisioning practices in the NBFC sector.

 

Credit growth of the NBFC sector remains strong, though it has eased from earlier highs. Year-on-year growth rose from about 9-10 per cent in September 2021 to a peak of nearly 22 per cent in mid-2023, slowed during 2024, and then recovered to 21.3 per cent by September 2025, indicating sustained lending momentum despite tighter financial conditions.

 

Retail credit continues to be the main growth driver, though at a slower pace. Growth in NBFCs’ retail credit has moderated to 22.4 per cent in September 2025 from a high of about 34-35 per cent in mid-2023, as per the data.

 

Credit costs for NBFCs have declined, supporting profitability despite emerging asset quality pressures. NBFCs’ credit costs fell from around 6.3 per cent in September 2021 to 4.4 per cent by September 2025, reflecting improved recoveries and benign asset quality conditions, the report said.