RBI warns of risks in bank-NBFC interlinkages, asset concentration

The RBI's Financial Stability Report warns that banks are increasingly buying NBFC-originated loans to scale retail portfolios, with nearly 80 per cent of assets sourced from a limited set of non-bank

The Reserve Bank of India (RBI) has red flagged concentration risks for banks as they increasingly buy loans originated from non-bank finance companies (NBFC) to scale up their retail portfolios.

 

Moreover, banks are acquiring around 80 per cent of these assets through a limited number of NBFCs, which could create correlated risk and amplification of stress, the financial stability report of the RBI released on Wednesday said.

 

“Banks are increasingly acquiring these assets to scale their retail portfolios, earn higher yields, and meet priority-sector targets,” the report said while observing that credit performance of acquired pools by public-sector banks has been weaker than their own originations, with direct assignment and co-lending pools showing higher loan losses.

 

 

Private banks, on the other hand, have acquired pools that performed better.

 

The report further said the overall risk in the NBFC sector, as reflected in the non-banking stability indicator (NBSI) rose in September 2025 compared to its eight-year low in September 2024. The NBSI, however, remained below the long-term average and steady vis-à-vis the March 2025 position, aided by improvement in asset quality and liquidity.

 

The report noted that in recent years, bank-NBFC interlinkages have evolved beyond the traditional lending-borrowing channel as NBFCs increasingly sell or securitise their retail and MSME loan portfolios. Banks are not only extending credit to NBFCs but also acquiring NBFC-originated assets through transfer of loan and securitisation, including direct assignment, pass through certificates, and co-lending arrangements.

 

According to the report, asset quality of direct assignments has steadily improved for both public-sector banks and private-sector banks. Gross non-performing asset (GNPA) ratios decline over time, with private banks consistently showing lower stress than public-sector lenders, indicating better underwriting and monitoring in transferred pools. GNPA ratio of PSBs for direct assignments was at 7.7 per cent at end-September, a tad down from end-March, 2025, when it was 7.8 per cent. In March 2024, the ratio was at 8.5 per cent. GNPA ratio for private banks at end-September was at 1.5 per cent against 1.4 per cent in end-March, 2025.

 

For co-lending, the GNPA ratios are higher than direct assignment, especially for public-sector banks, suggesting relatively greater risk in co-originated portfolios. However, asset quality has improved by September 2025, indicating stabilisation as frameworks mature. The GNPA ratio of public-sector banks was at 5.7 per cent at end-September while that of private banks was just at 2 per cent at end-September, 2025.

 

Data showed that the top five originators account for a large majority of exposures in direct assignment, co-lending, and PTCs. By September 2025, co-lending concentration rose to around 85 per cent, highlighting reliance on a small set of large NBFC partners. On the other hand, concentration in direct assignment and PTCs has eased modestly over time but remains elevated around the mid-70 per cent range, implying limited diversification.