The rating agency Icra has highlighted that the non-banking financial companies (NBFCs) are likely to witness headwinds related to funding availability, which is expected to impede growth vis-à-vis the robust expansion in the last two fiscals. ICRA projects the growth of NBFC assets under management (AUM) to ease to 13 to 15 per cent in FY2025 from 18 per cent in FY2024.
The rating agency added that standing at about Rs 47 trillion in March 2024, the sector AUM is set to cross Rs 50 trillion in FY2025. Key challenges for meeting growth expectations, however, would be in accessing the required debt funding over and above the refinancing of existing debt.
The estimated incremental debt funding for AUM expansion is Rs. 5.6 to 6.0 trillion for FY2025. Notwithstanding the sizeable demand and unmet credit requirements, the downside risk to the indicated NBFC AUM growth would accentuate, if the tight funding environment, as witnessed in Q1 FY2025, continues for a prolonged period in the current fiscal.
“The banking sector, a key lender to the NBFC segment, is expected to register an overall credit expansion of around 12 per cent in FY2025, resulting in an incremental bank credit of about Rs. 19.0-20.5 trillion. This, however, is lower than the Rs. 22 trillion credit expansion in the last fiscal. Further, the impact of tightening regulatory norms for bank funding to the sector is already visible over the last few months. Incremental direct bank credit to the NBFCs in Q1 FY2025 was a modest Rs. 75 billion compared to Rs. 920 billion in Q1 FY2024,” said A M Karthik, Senior Vice President and Co-group Head- Financial Sector Ratings, Icra said.
More Trouble For NBFCs?
The rating agency added that slowing direct bank credit will push the NBFCs towards capital market instruments. However, banks are one of the largest participants and are by far the largest subscribers of the securitisation and loan sell-downs by the NBFCs. Deposit challenges faced by banks and the push for the NBFCs to diversify their borrowing profile are likely to see the weighted average cost of funds projected to increase by 20 to 40bps over the FY2024 levels.
Notably, slower growth and portfolio seasoning following the steep credit expansion in the retail asset segments in the last two fiscals, would start being visible in the asset quality performance in FY2025. Further, concerns about overleveraging and increased share of unsecured loans exist, whereby credit risk is likely to pose an elevated loan quality risk for the sector. The share of unsecured loans (personal and business purposes) expanded to 11 per cent of the overall NBFC AUM in March 2024 from 7 per cent in March 2021.
ICRA expects the overall retail asset loan quality (gross stage 3) of the NBFCs, excluding housing finance companies (NBFC-HFCs), to weaken by 30 to 50 bps in the current fiscal. The NBFC-HFCs’ and the NBFC infrastructure finance companies’ (IFCs’) loan quality, however, shall remain range-bound with expectations of 10-20 bps improvement from March 2024 levels
The elevated cost of funds, increased competitive pressures from banks, slowing growth and asset quality challenge would result in weakening profitability for the NBFCs (excluding the HFCs and the NBFC-IFCs), which is expected to decline by 25 to 45 bps vis-à-vis FY2024 levels. The NBFC-HFCs and NBFC-IFCs would also be faced with margin pressures given the elevated funding costs, however, the impact may be lower than their peers in the sector.
Notwithstanding these near-term pressures, Icra notes that the sector is adequately capitalised, which upholds its risk profile, and the rating agency, therefore, foresees a stable outlook for the sector.
