Icra Sees 12-14% Growth In NBFC Retail AUM In FY24

The retail assets under management (AUM) of non-banking financial companies (NBFCs) are likely to witness a healthy growth of 12-14 per cent in the fiscal year 2024, the rating agency Icra said in a report.

This follows a strong rebound in FY2023 and surpasses the earlier estimates for AUM growth, according to Icra.

As of December 2022, NBFC retail AUM stood at Rs 12.8 trillion, reflecting a significant increase of approximately 20 per cent year-on-year (YoY).

The report highlighted that the growth in FY24 will be primarily driven by the unsecured segments i.e. personal credit and microfinance. It accounted for 27 per cent of the AUM in December 2022. 

Icra added, "The intensified competition from banks in traditional asset segments has prompted entities to increasingly target these unsecured segments." However, the vehicle finance segment, constituting about 40 per cent of the NBFC retail book, is expected to grow at a relatively slower pace.

During FY2023, loan against properties (LAP) and small and medium enterprise (SME) loans experienced robust growth. The gold loan segment is anticipated to face challenges due to intensified competition from banks.

The overdue in the NBFC retail sector has fallen below pre-pandemic levels, with most entities successfully addressing their pandemic-affected portfolios through higher write-offs, it added.

Additionally, restructured books have significantly diminished and are currently at manageable levels, reflecting the overall solvency profiles of the entities.

While asset quality is expected to continue to improve, leading to the unwinding of provisions and lower credit costs, margins are likely to face pressure in FY2024, Icra mentioned.

Consequently, net profitability is projected to moderately decline from the estimated level of 2.5-2.7 per cent in FY2023 to 2.4-2.6 per cent in FY2024.

The report also emphasised that capitalisation has remained adequate as growth has revived. The current capital profile, coupled with the sector's internal profit generation, is expected to sufficiently support near-to-medium-term growth. 

"Whereas, certain entities experiencing exceptionally high growth rates may need to raise additional capital," it stated.

In recent years, the funding mix for NBFCs has gradually shifted towards long-term sources such as term loans and debentures. Banks have played a crucial role as principal lenders by providing direct exposures, investing in capital market instruments, and participating in loan sell-downs. 

The rise in securitisation volumes has further strengthened funding for the sector. The report suggests that the incremental funding requirement should be manageable to meet the estimated growth.

The report predicted an optimistic outlook for NBFCs in the retail segment, anticipating strong growth in FY2024. 

"While challenges such as margin pressure and intensified competition from banks persist, the sector is expected to benefit from improved asset quality and a favourable funding mix," it added.