Large and diversified NBFCs are expected to grow 20 per cent year-on-year in FY25, slower than 27 per cent in FY24 due to capital constraints and increased regulatory scrutiny, according to India Ratings.

“Regulatory scrutiny and compliance have been the ongoing need of the hour for NBFCs. This is because they are scaling up and their dependence on and inter-connectedness with banks is increasing,” the rating agency said while maintaining a ‘neutral’ outlook on the sector.

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Around one-third of the incremental growth for NBFCs, in FY24 so far, has been driven through unsecured lending, where the regulator has tightened risk weights and increased the cost for the system to contain over leveraging of borrowers and manage systemic risk. 

NBFCs’ unsecured loan sanctions accounted for 28.8 per cent of total sanctions in Q2 FY24, lower than 33 per cent in the previous quarter.

Way ahead

Going ahead, NBFCs are likely to prefer a calibrated approach towards growth in this segment, both business and personal loans. However, this is expected to be largely off-set by growth in loans against property (LAP), commercial vehicle finance and business loans led by improving property prices, rising vehicle prices, increased demand for used vehicles and higher working capital requirements.

As a result, NBFCs are seen resorting to more of retail debenture issues to improve granularity of funding and diversify the investor base, India Ratings said, adding that NBFCs have also started to become more asset-light by getting into co-lending and business correspondent arrangements which should optimise use of capital and support profitability.

“NBFCs would mobilise commercial papers (CPs) in a higher proportion, depending on the tenure of asset segments. They would also focus more on off-book tie-ups to increase franchisee, CP mobilisation to keep ALM sanctity, securitisation and an evenly balanced funding mobilisation from banks and capital markets in FY25. With the ever-increasing balance sheet size, NBFCs would keep looking for newer avenues (domestic and international) to raise funds,” it said. 

“NBFCs’ funding strategy will continue to be in focus for FY25. Furthermore, while net interest margins will be under pressure, other levers including fee income, operating expenses and credit costs will be used to minimise any impact on profitability” said Karan Gupta, Head and Director Financial Institutions, adding that stage 3 assets are seen flat at 3.3 per cent in FY25.