The India Finance Report 2023 released by the Reserve Bank of India's think tank, CAFRAL has been in news of late. This is CAFRAL's first major yearly report that aims to give the lowdown on the state of affairs in banking, NBFCs, capital markets and more in India.

In this blog, we will break down the report's main points and see what it means for India's money matters.

First up, the report says NBFCs (Non-Banking Financial Companies) have upped their capital cushions. Their capital to risk-weighted assets ratio or CRAR has gone up to a solid 27.6% in 2022-23. This is way above the RBI's minimum requirement of 15%. This extra capital buffer is a big comfort for investors and regulators.

It means NBFCs are well placed to absorb losses from loan defaults or market shocks without collapsing. It’s a total turnaround from 2018-19 when debt defaults by IL&FS group shook confidence in NBFCs. Many of them struggled to get funding after that crisis. Building capital is their way of regaining trust.

Next up, NPA ratios have also been declining for NBFCs. Lower NPA levels imply NBFCs are being more prudent in lending and monitoring credit quality. Gross NPAs reduced from 11.5% in March 2018 to 3.9% in March 2023. Net NPAs also fell from 6.1% to 1.0% during the same period. This is a reassuring trend for NBFC financial health.

Now, here's an interesting insight from the report - bank funding for NBFCs has gone up. Banks are lending more to NBFCs through loans, bonds, commercial papers etc. In August 2023, bank credit to NBFCs grew by 25.8% standing at Rs. 13.8 lakh crore as compared to Rs. 10.99 lakh crore a year ago indicating an overall credit growth.

But experts warn this rising dependence on banks also creates interconnected risks. If a major NBFC defaults, it can destabilize banks too. RBI closely monitors these risks, but the report says current risk metrics may underestimate systemic risks.

What lies ahead for NBFCs and the financial sector?

NBFCs enabled credit flow when banks were in the dumps due to mounting NPAs post-2008. India needs NBFCs to cater to unbanked customers and niche financing needs. But they need balanced regulation. Too harsh, and it stifles their operations. Too lenient, and we may get adverse side effects.

RBI should enhance monitoring using latest fintech but avoid excessive control. The aim should be robust NBFCs that can withstand isolated failures through better risk pricing, diversified funding sources and improved governance standards.

Banks too need better systems to identify risk concentration in NBFC exposures. The report has suggested some regulatory tweaks on capital and liquidity rules, stricter norm guidelines etc. But regulations can only do so much. The onus of prudent management lies with NBFCs themselves. They need to bolster risk controls, diversify portfolios and build leadership capability.

To ensure financial stability is both the regulators and institutions need to work in close quarters - that’s when India's financial sector will thrive and fuel the economy's growth engine.

That sums up the key aspects of the India Finance Report 2023 and its implications for the country's monetary health.