When one door shuts, another opens. This could not be more appropriate for India’s non-banking finance sector. But in this case, when one source of funding is shutting down, it’s not just one but many other sources have opened up.India’s non-banking financial sector was hit by the liquidity crisis post IL&FS default in August 2018. While the liquidity scenario has since improved, risk-aversion in lending to the sector persists, at least in the domestic debt market dominated by mutual funds and insurance companies.“Post IL&FS (crisis), there has been a risk aversion in the debt capital market. Investment by mutual funds in the debt market of NBFCs has come down in the last 15 months,” said Krishnan Sitaraman, Senior Director, CRISIL Ratings. According to SEBI data, mutual fund investment in the commercial paper (CPs) of NBFCs nearly halved to ₹72,542 crore as on January 2020 from ₹144,221 crore in August 2018. Similarly, investment in corporate debt (including floating rate bonds, NCDs and others) fell to ₹95,782 crore from ₹104,378 crore during the same period.“Non-banking finance companies (NBFCs) and housing finance companies (HFCs) are trying to find alternative funding sources to bridge that (liquidity) gap,” said Sitaraman. He also added that NBFCs and HFCs have identified securitisation, external commercial borrowings (ECBs), masala bonds, dollar bonds and retail bonds as some of the alternative sources of borrowing.SecuritisationWhile securitisationas a source of borrowinghas grown exponentially on the domestic front, overseas borrowing through off-shore loans and bond issuance are touching record levels. According to the Reserve Bank of India (RBI) data, financial services companies collectively raised ECBs worth $14.35 billion in the first three quarters of the current fiscal. This is 34 per cent more than $10.68 billion raised by the sector in the whole of FY19.A multi-pronged issueRajat Bahl, Chief Analytical Officer of Brickwork Ratings says the liquidity issue in the NBFC sector is a multi-pronged one.On one hand, the government pushes banks to lend more to NBFCs, leading to breach in their exposure limits, while on the other, the RBI’sframework for large exposure has increased the bank’s capital requirement if they lend to large corporates on an incremental basis. This has forced banks to cut their exposure to large corporates and NBFCs.“The idea of the RBI and government was that all these large corporates should move to the bond market to use the capital market more rather than depending on banks,” said Bahl, adding that the bond market was also frozen, so they were not able to lend to NBFCs.“Earlier, ECBs were taken because they were cheaper. Now that arbitrage is gone. It is now the availability of ECBs versus non-availability of domestic bonds,” he added.Of the $14.35 billion raised by the financial services companies, the share of NBFCs stood at $12.35 billion while HFCs raised $1.89 billion. Microfinance companies doubled their overseas borrowing at $113 million.“I see the overseas borrowing to continue, but the extent and growth will depend on how the domestic funding avenues pick up,” said CRISIL’s Sitaraman.