Non-banking finance companies saw strong growth over the past couple of years amid a surge in retail credit demand. However, that is changing fast, with the asset growth of NBFCs expected to slow sharply in the current financial year and the next, as regulatory requirements tighten, asset quality risks rise, and bank lending to the sector declines, forcing the companies to recalibrate their strategies.
Credit ratings agency CRISIL estimates growth in assets under management (AUM) of NBFCs will likely moderate to 15 to 17 per cent in 2024-25 and 2025-26, compared with a strong 23 per cent growth that was seen in the year ended March 2024.
Although the growth will still be above the decadal (FY2014-24) average of 14 per cent, CRISIL listed three key reasons behind the expected slowdown ahead. Firstly, there are rising concerns around household indebtedness and asset quality risks, which will have a bearing on growth strategies in specific retail asset segments such as microfinance and unsecured loans.
Secondly, regulatory compliance requirements have intensified with a focus on customer protection, pricing disclosures, and operational compliance, which will necessitate process recalibration. Thirdly, access to diversified funding sources, a crucial determinant of growth, especially given the slowdown in bank lending to NBFCs, will differ across companies.
"Recent regulatory pronouncements have brought to the fore the criticality of compliance—both in letter and spirit—and operational risk management. Additionally, asset quality metrics have weakened in some segments in the past few quarters. This has necessitated a recalibration of growth strategies, especially in unsecured loans and microfinance," said Krishnan Sitaraman, chief ratings officer at CRISIL.
Unsecured lending grew rapidly over the last three financial years, clocking a 45 per cent compounded annual growth (CAGR) and is now the third largest component of the overall NBFC AUM. However, that growth is expected to moderate significantly to 15-16 per cent, in the current financial year and the next, according to CRISIL.
Similarly, the microfinance segment is facing asset quality pressures, which will lead to a muted growth this year, compared with a 25 per cent rise in 2023-24. The microfinance segment is expected to recover next, but only cautiously, the ratings agency felt.
Importantly, bank lending to NBFCs, which had been largely supportive over the past 5-6 years, had remained in the range of Rs 13-13.5 lakh crore since November 2023, when regulatory risk weights were raised.
"Most of the large NBFCs, especially the parent-backed ones, have tapped alternative funding sources such as capital market instruments, foreign currency borrowings and securitisation over the last three quarters. For the rest, the ability to continue tapping such sources at an optimal cost remains crucial to growth," said Ajit Velonie, senior director at CRISIL Ratings.
There will be limited impact on two segments—home loans and vehicle loans, which account for 45 per cent of NBFC AUM, pointed CRISIL. The growth in these two traditionally large segments will continue to be driven by fundamentals, it said.
Home loans are expected to maintain a steady CAGR growth 13-14 per cent. Housing finance companies focused on the affordable segment (comprising loan size of less than Rs 25 lakh) are likely to grow at a faster pace of around 22-23 per cent CAGR.
Growth in vehicle finance is estimated to moderate, but will still remain around 15-16 per cent. Lower unit sales of new vehicles are expected to be offset by consumers shifting to higher-value vehicles, supporting AUM growth, said CRISIL.