Pressure On Banks' Credit-deposit Ratio Hits NBFC Funding, Says CareEdge

A CareEdge Ratings latest report has revealed that the pressure on banks' credit-deposit ratios raises concerns about non-bank financial companies' (NBFCs') ability to secure funds and enhanced regulatory supervision will lead to higher compliance costs, though necessary for stability.

There is a growing discussion on the need to monitor the end-use of funds by NBFC. Additionally, smaller NBFCs and smaller fintechs are facing challenges on the liability side, underscoring the need for strategic solutions to address these challenges.

The rating agency added that the NBFC sector in India is well-positioned for continued growth, bolstered by a thriving economy, robust balance sheets and a good portfolio mix. The sector's resilience and adaptability provide a strong foundation for future success. 

The last mile reach, understanding and focus on niche micro markets are expected to continue as their USP.

“As NBFCs continue to innovate and harness technology, their role in the financial ecosystem will become increasingly crucial, driving significant contributions to India's overall economic development, especially lower strata of the economy,” according to the report.

Talking about the positive trends, the report mentioned that the retail lending is increasing, with a focus on productive financing. NBFCs are effectively utilizing digital data to improve credit assessments and operational efficiency. Their balance sheets are stronger and credit costs are contained compared to previous years. 

According to the CareEdge Ratings, "The interest of equity investors remains robust and there is vast pool of debt capital overseas which is largely untapped.

India’s NBFC sector has demonstrated resilience, with credit growth accelerating in the post-pandemic period. NBFCs play a crucial role in the financial ecosystem, growing at a CAGR of 14 per cent. Amongst banks, NBFCs and all India financial institutions (AIFIs), NBFCs have maintained a 21 to 24 per cent share of credit from FY17 to FY24. 

The banks account for approximately 70 per cent and AIFIs make up the remaining 5 to 7 per cent. As India targets becoming a USD 5 trillion economy in the coming years, the demand for financing is set to increase, underscoring the vital role of NBFCs in supporting economic growth and development. 

The sector’s ability to adapt and innovate will be crucial in addressing the evolving needs of the expanding economy. “We expect NBFCs to grow at 17 per cent in FY25,” CareEdge Ratings added.