Going forward, diversification in product offerings and funding profile will be key constituents of their growth strategy
FinTech BizNews Service
Mumbai, November 22, 2023: Regulatory measures to calibrate unsecured loan growth Assets under management (AUM) of non-banking financial companies (NBFCs) are set to log a healthy 14-17% growth next fiscal on the back of continued strong credit demand across retail loan segments. Growth may be moderately lower than 16-18% expected in the current fiscal, as unsecured retail loans, the fastest growing segment in the NBFC AUM pie so far, are likely to see a relatively slower growth as NBFCs recalibrate their strategies due to the recent regulatory measures issued by the Reserve Bank of India (RBI). Going forward, diversification in product offerings and funding profile will be key constituents of their growth strategy. Retail credit growth continues to be driven by sound underlying macro and micro factors. Private consumption is trending well above the long-term average as retail spends on homes, vehicles and consumer durables remain strong. And backed by healthy balance sheets, NBFCs have been agile to ride this retail credit-growth wave. Says Gurpreet Chhatwal, Managing Director, CRISIL Ratings, “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.”
The two largest traditional segments of home loans and vehicle finance now comprise 25-27% each of the NBFC AUM. Both segments are expected to report steady growth. In the home loan segment, growth of 12-14% 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% this fiscal and sustain 17-18% growth next fiscal on the back of solid underlying-asset sales. “Unsecured loans is now the third largest segment in the NBFC AUM pie. And 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.”, adds Chhatwal. First is the increase in risk weights for unsecured retail loans to 125% from 100%. This will result in a decrease in capital adequacy ratio (CAR), linked to the share of unsecured retail loans in overall AUM. However, CRISIL Ratings’ analysis indicates that unsecured retail loans contribute only 12-14% to the NBFC sector AUM pie, while the balance comes from secured asset classes such as housing, vehicle, SME4 and gold loans, where risk weights remain at 100% or lower. The impact on CAR 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. Second is the increase in risk weights for bank exposure to NBFCs by 25 percentage points for NBFCs rated in the ‘A’ category and above. Following this, banks will need to maintain higher capital on loans to such NBFCs. This may have an impact on funding profile and borrowing costs of NBFCs as banks could increase interest rates to offset the higher cost of capital. As per CRISIL Ratings’ estimates, 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. Third is the regulatory directive to strengthen credit standards and review sectoral exposure limits especially for unsecured retail loans. Banks could reassess their lending limits for the NBFC sector while NBFCs could adopt a more calibrated growth strategy for overall unsecured loans. Growth in this segment could moderate to 20-30% next fiscal as compared with 45% in fiscal 2023.
Consequently, the future strategy for NBFCs is expected to focus on two key areas — diversification of products offered and funding.
Says Krishnan Sitaraman, Senior Director and Chief Ratings Officer, CRISIL Ratings, “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, 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 of 18% and stood at Rs 12.3 lakh crore as of September 2023 (against Rs 5.5 lakh crore as of September 2018). And the recent regulatory measures have focused attention to this trend. “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.”, adds Sitaraman. Overall, the NBFC sector is on a strong wicket to tap consumption-linked growth opportunities over the medium term despite competition from banks. The impact of interest rates, inflation and indebtedness level on consumer demand and any future regulatory measures will bear watching.
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