Going by what most analysts predict, 2025 will be a year of slow growth for non-bank lenders. It won't be a surprise, though, given the stress developed in certain pockets through the past two years that prompted the central bank to put a leash on erring NBFCs.
The Reserve Bank of India (RBI) was particularly concerned about stress developed in the personal loan segment over 2023 and 2024. It also warned microlenders operating as non-bank financiers of cracks showing up in their books.
A boom in unsecured personal loans, which typically constitute a significant chunk of NBFCs in the form of pure play personal loans, and consumer loans had set off the alarm, pushing the banking regulator to raise the risk weight on such loans in late 2023. The growth decelerated immediately and it sustained as the industry stayed cautious through 2024. This slowed down the overall momentum of the industry.
According to AM Karthik, senior vice-president and co-head of the group for financial sector ratings at ICRA Limited, the overall NBFC growth is likely to moderate to 13-15 percent in FY2025 from 18 percent a year back, with the decline in growth largely driven by lower growth in the retail loan segment, especially unsecured loans.
The retail loan growth too may ease out to 16-18 percent from 25 percent in this period, with unsecured loan growth expected to nearly halve from the 36 percent.“Growth shall remain moderate in FY2026, given the asset quality related headwinds, and various regulatory tightening seen in the recent past,” Karthik said.
What happens when credit growth slows? Some borrowers, especially those leveraged at a steeper pace in the last few fiscals, face cash-flow stress, and the spill-over impact of the stress that's more visible in unsecured loans compared to the secured loans continues to be a significant monitorable for the near term.
All this will translate into a dent in profitability for the non-bank lenders.
But that's not the end of woes for the lenders. The non-bank financiers stare at bank fundings drying up. In an earlier piece, I had written how banks were shying away from lending to NBFCs in a stricter regulatory regime. Going by the RBI sectoral credit growth data, bank credit to NBFCs contracted 1.2 percent till July.
On a year-on-year basis, bank credit to the segment grew slower at 12.7 percent in the 12 months ended July, compared with nearly 20 percent growth in the previous comparable period. In absolute terms, as against a total loan outstanding of Rs 15.2 lakh crore as on July 26, 2024, total bank loan outstanding to the NBFCs was Rs 15.5 lakh crore in end-March 2024.
This means banks are now very selective in funding NBFCs. Only top-rated NBFCs get loans at relatively lower rates. Firms rated 'AA' and below are struggling to access bank credit. Those rated higher are taking away 90 percent of bank credit.
As the smaller NBFCs fail to raise money from the bond market at attractive rates, they are left with only two options - either shrink their credit growth or borrow at a higher rate from banks. But neither typically augurs well for the shadow banks. Shrinking the loan book will mean a hit on profitability and loss in customers. Borrowing in higher rates, on the other hand, will translate into charging a higher interest from the end-user and consequently raising the repayment pressure on the borrower. This will reflect on the asset quality of the NBFC sooner than later.
Though narrower margins and slower growth may not enthuse investors, a period of deceleration is still better for the companies than zipping at an aggressive growth that would eventually backfire on them.
(Banking Central is a weekly column that keeps a close watch on and connects the dots regarding the sector's most important events for readers.)
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