Indian NBFCs Poised For 17% Growth In FY25: CareEdge Report

India's non-banking financial companies (NBFCs) are on a remarkable growth trajectory, bolstered by the country's status as the fastest-expanding economy and the fifth-largest globally. With a substantial 22 per cent share of the credit market, NBFCs have demonstrated resilience and adaptability, maintaining strong balance sheets and improved asset quality, according to a report by CareEdget Ratings.

As the demand for financing surges, particularly in the retail sector, NBFCs are poised to play a pivotal role in supporting India's economic ambitions.

Economic Landscape and Credit Demand
India's economy is witnessing robust growth, with favourable GDP rates despite global geopolitical uncertainties. The NBFC sector has shown remarkable resilience, particularly in the post-pandemic landscape, with a compound annual growth rate (CAGR) of 14 per cent. 

From FY17 to FY24, NBFCs have consistently held a credit market share of 21-24 per cent,  while banks dominate with approximately 70 per cent, and All India Financial Institutions (AIFIs) account for the remaining 5-7 per cent, the report added.

As India aims to achieve a USD 5 trillion economy, the demand for financing is expected to rise, emphasising the importance of NBFCs in fostering economic progress. Projections indicate that NBFCs will experience a growth rate of 17 per cent in FY25.

Strengthened Financial Metrics
Over the last decade, NBFCs have demonstrated remarkable resilience, even in the face of systemic shocks like the pandemic, largely due to crucial regulatory support and government initiatives. Currently, NBFC balance sheets are robust, with leverage ratios reduced from a peak of 4.5 to 3.1 times. 

Asset quality has also improved significantly, with the net non-performing asset (NNPA) ratio at a historic low of 1.1 per cent, despite the introduction of stricter incomer recognition, asset classification and provisioning (IRAC) norms in November 2021. Credit costs, calculated as provisioning and write-offs charged to profit and loss divided by average assets, are nearing their lowest point, although a slight increase in credit costs is anticipated in the medium term.

Additionally, the asset-liability maturity profile has strengthened, with reliance on short-term funding, such as commercial papers, decreasing from approximately 9 per cent in FY17 to about 3 per cent in FY24.

Shift Towards Retail Lending
The composition of NBFC portfolios has shifted significantly, moving away from wholesale lending to a focus on retail loans. Retail loans are now the primary drivers of NBFC growth, with housing loans leading, followed by loans to Micro, Small, and Medium Enterprises (MSMEs), Loan Against Property (LAP), and vehicle loans. 

This transition has resulted in a more diversified and resilient loan portfolio, supported by the emergence of new players like credit AIFs and private credit markets. The preference of lenders and equity investors for retail-focused NBFCs has facilitated this rapid transition.

Wholesale lending within the NBFC sector is now primarily managed by specialised entities such as Infrastructure Finance Companies (IFCs) or Infrastructure Debt Funds (IDFs), which are specifically mandated to cater to this space. 

Notable players in this area include PFC, REC, IRFC, NaBFID, NIIF IDF, and Aseem Infra. The proportion of retail loans has increased from 42 per cent in FY2018 to 53 per cent in FY24.

Unsecured Personal Loans And Digital Lending
The expansion of unsecured personal loans within the NBFC sector has been notable, driven by increased borrower penetration. 

The value of personal loans originated by NBFCs skyrocketed from Rs 0.58 lakh crore in FY21 to Rs 2.85 lakh crore in FY24. This growth is accompanied by a significant rise in the number of loans originating, increasing from Rs 1.9 crore in FY21 to Rs 10.4 crore in FY24. 

The average loan size currently stands at Rs 25,000, although there is a noticeable shift towards higher ticket and longer-tenure loans. This segment is also exhibiting higher delinquency trends, highlighting the necessity for vigilant risk management as NBFCs expand their loan offerings.

The Rise Of Fintech NBFCs
Fintech NBFCs have experienced rapid growth in recent years, leveraging technology to enhance efficiency and broaden customer reach. The Assets Under Management (AUM) of CARE-rated fintech NBFCs surged from Rs 10,262 crore in FY20 to Rs 33,676 crore in FY24, reflecting a significant year-on-year increase. However, growth rates are expected to moderate for the current fiscal year due to a higher base and potential funding constraints.

Fintech NBFCs have maintained healthy pre-provision operating profit (PPOP) margins and a reduction in credit costs has improved profitability, making them increasingly economically viable.

Rising Share Of Bank Borrowings
The overall exposure of various debt providers to NBFCs has increased in line with their book growth. However, in percentage terms, the funding patterns indicate a growing reliance on bank loans, while the share of the bond market has declined. This trend is evident across different rating categories. 

For AAA-rated entities, market instruments dominate the borrowing mix, whereas entities rated AA and below predominantly rely on bank borrowings. Approximately 90 per cent of bank debt to NBFCs is extended to entities rated AA or higher.

Growing Interconnectedness With Banks
The interconnectedness between banks and NBFCs has escalated significantly, with bank financing to NBFCs quadrupling over the past seven years. Bank financing to NBFCs has increased from 5 per cent to approximately 9.4 per cent during this period. Excluding the potential impact of the HDFC merger, bank financing to NBFCs could approach 10.8 per cent. 

The Reserve Bank of India has expressed concerns regarding this growing interconnectedness and is encouraging NBFCs to diversify their funding sources. In addition to bank loans, banks also support NBFCs through investments in Non-Convertible Debentures (NCDs), Commercial Papers (CPs), and Pass-Through Certificates (PTCs), as well as through buyouts like Direct Assignments (DA) and Co-lending Mechanisms (CLM).

Regulatory Framework Balancing Risk And Growth
The proactive regulatory framework, supported by swift penal actions, has been instrumental in balancing risk and growth within the NBFC sector. Recent regulations, including scale-based norms and alignment of IRAC norms for NBFCs with those of banks, contribute to a more robust sector. 

"The RBI has taken decisive penal measures against several prominent NBFCs for regulatory violations, reinforcing the importance of adherence to regulatory standards and maintaining sector stability," according to the report.

Strengths and Challenges
The NBFC sector in India is currently experiencing several positive trends, including increasing retail lending focused on productive financing. NBFCs are effectively utilising digital data to enhance credit assessments and operational efficiency. Their balance sheets are stronger, and credit costs are more contained compared to previous years. Equity investor interest remains robust, and there is a vast pool of untapped overseas debt capital.

However, challenges persist. Pressure on banks' credit-deposit ratios raises concerns about NBFCs' ability to secure funds. Enhanced regulatory supervision will lead to higher compliance costs, although this is necessary for stability. There is a growing need to monitor the end-use of funds by NBFCs, and smaller NBFCs and fintechs face challenges on the liability side, underscoring the need for strategic solutions.

The NBFC sector in India is well-positioned for continued growth, supported by a thriving economy, robust balance sheets, and a diversified portfolio mix. The sector's resilience and adaptability provide a strong foundation for future success. As NBFCs continue to innovate and leverage technology, their role in the financial ecosystem will become increasingly crucial, driving significant contributions to India's overall economic development, particularly for the lower strata of the economy.