The rules, which raise the capital that banks need to set aside for personal loans directly and indirectly via NBFCs, will mean that bank borrowings for NBFCs are set to become more expensive, pushing lenders to tap the bond market.

Bank borrowing costs for these lenders are set to rise 25-30 basis points (bps), which will make bond market borrowings relatively cheaper, said an official at a mid-sized NBFC.

The official and the sources did not want to be identified as they are not authorised to speak to the media.

Bajaj Finance, SBI Cards, and L&T Finance did not respond to a Reuters' email seeking comment.

"The NBFCs which were heavily reliant on bank borrowings will now will have to raise funds from the capital markets," said Umesh Revankar, executive vice chairman at Shriram Finance.

The company will look to raise 50 billion rupees through retail deposits, external commercial borrowings, and capital markets for the rest of the fiscal year, Revankar said.

Refinitiv AAA-rated NBFC bond yields are between 7.75%-7.95% for two-year to five-year papers, while the three-year marginal cost of lending rates for top banks is in the 8.75%-9.25% range.

The gap in the cost of funds via banks and bond markets will widen further now.

The momentum of bank lending to NBFCs, other than those that lend to segments identified as priority sectors for lending, is likely to moderate, ratings agency CareEdge said in a note, adding highly-rated NBFCs will move towards the capital markets.

Banks' credit exposure to NBFCs stood at 14.2 trillion rupees in September, a 26.3% year-on-year growth, compared to overall bank credit in India, which grew about 15% over the past year.

NBFCs will look at options to raise funds at the most affordable rates, while keeping some portion of their borrowings with banks, said Sumit Bali, group executive and head - retail lending at Axis Bank.

With higher borrowings from NBFCs, rates on such bond market borrowings may also move up by at least 10 bps, especially for entities reliant on unsecured lending, said Raju Sharma, head - fixed income at IDBI Mutual Fund.

($1 = 83.2440 Indian rupees)

(Reporting by Siddhi Nayak and Dharamraj Dhutia; Editing by Sonia Cheema)

By Siddhi Nayak and Dharamraj Dhutia