Banking Central | What lies ahead for India’s shadow banks?

NBFCs are set to enter the next phase of growth

India’s non-banking financial companies (NBFCs) are entering a phase of steady, broad-based growth, latest numbers suggest. The growth has been aided by strong consumption demand and supportive macroeconomic conditions.

Crisil Ratings expects sectoral assets under management (AUM) to rise 18–19 percent this year and the next, pushing the industry past the Rs 50 lakh crore mark by March 2027. On the face of it, this is a solid outcome but there is more to the story.

Primarily, the growth narrative rests on familiar pillars — rationalised GST rates that have reignited consumption and softer inflation.

Take the example of vehicle finance, which accounts for roughly 22 percent of NBFC AUM. The segment is expected to grow at 16–17 percent, aided by GST cuts that have boosted demand across categories, especially in cars.

The surge in premium-vehicle purchases and the rising comfort with used-vehicle financing are positives. But banks remain aggressive in new-vehicle funding, forcing NBFCs to defend market share while managing yield pressure.

Home finance, another 22 percent of the book, will expand at a moderate 12–13 per cent, a tad lower than the previous year. Public sector banks have tightened their grip on the prime home-loan customer, compressing margins for NBFCs.

Add to this the expected cooling of housing sales in major cities and the segment could see softer disbursals over the next few quarters.

The unsecured book presents the sharpest contrasts. Personal loans, nearly 11 percent of AUM, slowed dramatically in previous year after regulatory tightening prompted lenders to rework customer acquisition strategies.

With new-origin portfolio performance stabilising, growth is set to rebound to 22–25 percent.

The other side

Yet, the outlook is not uniformly upbeat. Unsecured MSME loans, around six percent of the AUM, are flashing early warning signs.

Delinquencies have climbed, as borrower leverage spikes and overlaps with microfinance borrowers widen. After growing at 31 percent for two consecutive years, the segment is expected to slow to 13–14 percent.

In contrast, the secured MSME and LAP segment, about 15 percent of AUM, remains robust with expected growth of 26–27 percent. Even here, lenders are getting wary of small-ticket loans due to early repayment stress.

Gold loans, which account for 6 percent of AUM, continue to outperform. The shift from informal lenders, elevated gold prices and renewed NBFC focus on the product line will keep this segment buoyant.

The real bottleneck is on the liabilities side. According to Crisil data, as of September, bank lending to NBFCs stood at Rs 13.8 lakh crore — barely above last year’s. The rollback of higher risk weights in April has not translated into a meaningful restart of bank flows.

What next?

Larger NBFCs have tapped bond markets and offshore borrowings, but mid-sized entities remain dependent on banks. Their growth prospects will be decided not by demand but by the pace at which bank credit normalises.

The message? NBFCs are well positioned for the next phase of expansion but this is not the time for complacency.