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Non-Banking Financial Companies (NBFCs) are expected to register a rise of 14-17% growth in assets under management (AUM) next fiscal, aided by strong credit demand across retail loan segments, according to CRISIL Ratings.
Meanwhile, the AUM growth is likely to moderate below 16-18% in the current fiscal, as unsecured retail loans, the fastest growing segment in the NBFCs’ loan portfolio, will slow down because NBFCs will tweak their strategies due to the recent regulatory measures issued by the Reserve Bank of India (RBI), the rating agency said. It further said that NBFCs will have to diversify their product offerings and funding profile for their growth strategy.
The rating agency noted that retail credit continues to grow on the back of positive macro and micro economic factors. Moreover, strong private consumption led by retail spends in segments like housing, vehicles and consumer durables are driving retail credit growth and NBFCs with healthy balance sheets have been able to capitalize on the growth.
“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 NBFC — home and vehicle loans — now comprise 25-27% each of total AUM. Home loan segment is expected to see steady 12-14% growth next fiscal, driven by HFCs focus on affordable loans under Rs 25 lakh. Meanwhile, vehicle finance is likely to grow 18-19% this fiscal and continue to grow at 17-18% next fiscal on the back of strong underlying automobile sales
Impact of RBI's new norms on unsecured loans
The rating agency stated that unsecured loans is now the third largest segment in the NBFC AUM pie and it is likely to see slower growth due to tighter regulatory measures by the RBI that will affect NBFC AUM growth on both their asset and liability sides on three fronts.
Firstly, increased risk weights of 125% (from 100%) on unsecured retail loans will lower capital adequacy ratios (CAR) with respect to the share of these loans in the overall AUM. However, CRISIL Ratings’ analysis showed that such loans comprise just 12-14% of total AUM among NBFCs, while the rest are secured loans with risk weights of 100% or lower. So the CAR impact should be under 75 basis points for most NBFCs. For a few NBFCs whose share of unsecured retail loans is over half their loan book, the impact will be higher but manageable as they are either backed by strong parentage or have existing buffers in CAR.
Secondly, the risk weights on bank exposure to NBFCs, which are rated in the ‘A’ category and above, have been increased by 25 basis points. As a result, banks will need to maintain higher capital on loans to such NBFCs. This is likely to have an impact on funding profile and borrowing costs of NBFCs as banks could raise interest rates to offset the higher cost of capital.
CRISIL Ratings’ estimates suggest that bank loan borrowing costs for NBFCs could increase 25-50 bps. However, its impact on the balance sheets of NBFCs will be lower and linked to the extent of their reliance on bank funding
Thirdly, banks could tighten sectoral exposure limits and NBFCs could take a cautious approach with respect to growth for overall unsecured loans. Therefore, growth in this segment could moderate to 20-30% next fiscal, down from ~45% in fiscal 2023.
Outlook
CRISIL Ratings said that the future will revolve around two things — product diversification and funding diversification. According to Krishnan Sitaraman, Senior Director and CRO at CRISIL Ratings, “Product diversification will be key, especially for NBFCs that specialize in underserved segments, through organic, inorganic and partnership models.”
On funding, NBFC dependence on bank loans has risen recently, growing 18% CAGR over fiscals 2018-2023 to Rs 12.3 lakh crore compared to Rs 5.5 lakh crore at the end of September 2018. “To ensure access to consistent and stable funding, we expect NBFCs to consciously diversify their resource mix and increase share of avenues like securitisation and debt capital funding. Focus on co-lending and direct assignments for capital-efficient growth is expected to continue.”, said Sitaraman.
Overall, NBFCs are well positioned to tap India’s consumption-led growth in the medium term, though banks remain tough competitors. The rating agency said that the sector outlook will depend on how interest rates, inflation and debt levels impact consumer demand going forward as well as any future regulatory measures.