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CRISIL Ratings anticipates a 14-17 per cent growth in the assets under management (AUM) of non-banking financial companies (NBFCs) in the fiscal year 2024-25, owing to sustained robust demand in retail loan segments. While this growth projection is slightly lower than the 16-18 per cent recorded in FY23-24, it reflects the continued strength in secured asset classes, particularly home loans and vehicle finance. 

These two segments constitute a significant share of NBFC AUM, with home loans expected to grow 12-14 per cent, driven by a focus on affordable housing, and vehicle finance projected to sustain 17-18 per cent growth. Unsecured retail loans, now the third-largest NBFC AUM segment, are expected to witness a moderation in growth due to recent regulatory measures targeting this category.

CRISIL Ratings' analysis reveals that unsecured retail loans contribute only 12-14 per cent to the NBFC sector AUM, with the majority coming from secured asset classes like housing, vehicle, SME, and gold loans. Risk weights for these secured asset classes remain at 100 per cent or lower. The impact on Capital Adequacy Ratio (CAR) is estimated to be less than 75 basis points for most NBFCs. Even for those with a higher share of unsecured retail loans, the impact is deemed manageable due to strong parentage or existing buffers in CAR.

In response to the regulatory changes, NBFCs are expected to focus on product diversification, with an emphasis on reaching, underwriting and serving challenging customer segments. This diversification is envisioned to occur through a mix of organic expansion, inorganic growth and strategic partnerships. On the funding side, there is a trend toward increasing reliance on banking borrowings, with bank loans to NBFCs growing at a compound annual growth rate (CAGR) of 18 per cent over the last five fiscal years, reaching Rs 12.3 lakh crore as of September 2023.

To ensure consistent and stable funding access, NBFCs are likely to consciously diversify their resource mix and increase the share of alternative avenues such as securitisation and debt capital funding. The strategic focus on co-lending and direct assignments for capital-efficient growth is expected to persist. Krishnan Sitaraman, Senior Director and Chief Ratings Officer at CRISIL Ratings, highlights the importance of product diversification as a key agenda for NBFCs, emphasising their core competency in addressing challenging customer segments.