Credit rating agency ICRA has issued a warning note on unsecured loans from non-banking finance companies (NBFCs), even as it sees a 25-30 per cent growth in assets under management (AUM) of the shadow banks in FY24 and FY25.
The rating firm pointed out that the high growth observed in the past and the expected AUM expansion in the future could present challenges, especially in maintaining portfolio profitability at low levels. The report points out that long-tail loans, including affordable housing and secured business loans, are especially susceptible.
“High growth in the past and the expected AUM expansion going forward, will keep the portfolio seasoning at low levels, especially for the long-tail loans, namely affordable housing and secured commercial loans,” it said in a report.
While the reported Gross Stage 3 assets for ICRA-rated entities were manageable at 2.6 percent in March 2023, the report acknowledges the need for continued scrutiny. This aspect, according to ICRA, is an improvement from the 4.2 percent reported in March 2022.
The same is lower than the levels reported by larger players – a sample of 39 entities considered for ICRA’s analysis, driven by disposals and faster AUM growth, it said.
Losses of digital lenders
However, digital lenders in the sample set reported higher loan losses, with write-offs standing at 9-10 percent in the last two fiscals.
“Entities in the unsecured loan segments would be required to raise capital in the next 12-18 months to keep their leverage under control,” he added.
ICRA highlights that entities focusing on non-performing loans may need to raise capital in the next 12-18 months to maintain control of leverage. The report emphasizes the importance of financial institutions proactively managing their capital positions to navigate potential challenges in the unsecured lending space.
The report also projected debt financing for medium and small NBFCs at Rs 2.2 lakh crore over the next two years (FY24 and FY25). This projection is consistent with the anticipated growth of AUMs within the industry. ICRA sheds light on the changing dynamics of loan profiles, with bank loans and loans from financial institutions dominating, while Non-Convertible Bonds (NCDs) saw a decrease to 20%, reflecting tension in capital markets.
Collaborative lending has emerged as a crucial source of funding for medium and small NBFCs, accounting for nearly 28-30% of off-balance sheet exposure in March 2023. The report observed that this collaborative approach is expected to gain momentum in specific segments, including automotive loans, home loans, and Loan Against Property (LAP) SMEs over the medium term.