Assets under management (AUM) of non-banking financial companies (NBFCs) are set to log a 14-17 percent growth next fiscal (FY24-25) on the back of continued strong credit demand across retail loan segments; according to the CRISIL Ratings, a rating agency.
CRISIL Ratings further added that the growth may be moderately lower than 16-18 percent and expected in FY23-24, as unsecured retail loans, are the fastest-growing segment in the NBFC AUM.
“The recent regulatory measures are targeted at unsecured retail loans and do not impact the secured asset classes where growth is expected to be steady. Importantly, the regulatory changes do not impact HFCs," said Gurpreet Chhatwal, Managing Director, CRISIL Ratings.
"The two largest traditional segments of home loans and vehicle finance now comprise 25-27 percent each of the NBFC AUM. Both segments are expected to report steady growth. In the home loan segment, growth of 12-14 percent next fiscal will be driven by HFCs’ focus on affordable home loans (ticket sizes of less than Rs 25 lakh), while vehicle finance is expected to grow 18-19 percent this fiscal and sustain 17-18 percent growth next fiscal on the back of solid underlying-asset sales, "Chhatwal added.
He further added that the unsecured loans are now the third largest segment in the NBFC AUM pie. "This segment is likely to see a moderation in growth due to the regulatory measures which affect NBFC AUM growth on both their asset and liability sides on three fronts, "he said.
However, CRISIL Ratings’ analysis indicates that unsecured retail loans contribute only 12-14 percent to the NBFC sector AUM pie, while the balance comes from secured asset classes such as housing, vehicle, SME, and gold loans, where risk weights remain at 100 percent or lower.
The impact on CAR (Capital Adequacy Ratio) is expected to be less than 75 basis points (bps) for most NBFCs. For a few whose share of unsecured retail loans is over half their loan book, the impact is higher but manageable as they are either backed by strong parentage or have existing buffers in CAR.
Additionally, CRISIL Ratings estimates, bank loan borrowing costs for NBFCs could increase 25-50 bps.
Krishnan Sitaraman, Senior Director and Chief Ratings Officer, CRISIL Ratings said, “Product diversification will be a key agenda for NBFCs whose core competence lies in the ability to reach, underwrite and cater to difficult-to-address customer segments. The diversification is expected to be through a mix of organic, inorganic, and partnership routes.”
On the funding side, the share of banking borrowings has been on an increasing trend in recent years. Over the last five fiscals, bank loans to NBFCs logged a compound annual growth rate (CAGR) of 18 percent and stood at Rs 12.3 lakh crore as of September 2023 (against Rs 5.5 lakh crore as of September 2018).
“To ensure access to consistent and stable funding, we expect NBFCs to consciously diversify their resource mix and increase the share of avenues like securitisation and debt capital funding. Focus on co-lending and direct assignments for capital-efficient growth is expected to continue.”, adds Sitaraman
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