Assets under management (AUM) of non-banking finance companies (NBFCs) are poised to register a healthy 14-17% growth next fiscal on the back of continued strong credit demand across retail lending segments, global rating agency CRISIL said in its recent report. .
Growth may be moderately lower than 16-18% expected in the current fiscal, as unsecured retail loans, the fastest growing segment in the NBFC AUM pie so far, are likely to see relatively slower growth as NBFCs recalibrate their strategies due to the recent . regulatory measures issued by the Reserve Bank of India (RBI), it emphasized.
“Unsecured loans are now the third largest segment in the NBFC AUM pie. And this segment is likely to see moderation in growth due to the regulatory measures affecting growth of NBFC AUM on both its assets and liabilities side on three fronts.”, said Gurpreet Chhatwal, Managing Director of CRISIL Ratings.
“The recent regulatory measures target unsecured retail loans and do not affect the secured asset classes, where growth is expected to be constant. Importantly, the regulatory changes do not affect HFCs,” he added.
Going forward, diversification in product offerings and financial profile will be key components of their growth strategy.
The increase in risk weights for unsecured retail loans to 125% from 100% will result in a decrease in capital adequacy ratio (CAR), linked to the share of unsecured retail loans in total AUM.
It should be noted that RBI has decided that the consumer credit exposure of NBFCs – outstanding as well as new – categorized as retail loans, excluding housing loans, education loans, vehicles, loans against gold jewelery and microfinance/SHG loans. risk weight of 125%. The loan exposures of NBFCs generally attract a risk weight of 100%.
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However, CRISIL Ratings’ analysis indicates that unsecured retail loans contribute only 12-14% to the NBFC sector AUM pie, while the balance comes from secured asset classes such as housing, vehicle, SME and gold loans, where risk weights remain at 100 % or lower.
The impact on CAR is expected to be less than 75 bps for most NBFCs. For some, whose share of unsecured retail loans is more than half of their loan book, the impact is higher but manageable as they are either supported by strong parentage or have existing buffers in CAR.
Bank borrowing costs for NBFCs could increase
As per CRISIL Ratings estimates, bank borrowing costs for NBFCs could increase by 25-50 bps. However, its impact on the balance sheets of NBFCs will be lower and linked to the extent of their dependence on bank funding.
The move to increase risk weights for bank exposure to NBFCs by 25% points for NBFCs rated in the ‘A’ category and above will tend banks to maintain higher capital on loans to such NBFCs. This may have an impact on financial profile and borrowing costs of NBFCs as banks could increase interest rates to offset the higher cost of capital.
RBI has announced an increase in risk weights on exposures of SCBs to NBFCs by 25% points, over and above the risk weight associated with the predetermined external rating, in all cases where the existing risk weight as per external rating of NBFCs is below 100%.
CRISIL also highlighted that banks could reassess their lending limits for the NBFC sector while NBFCs could adopt a more calibrated growth strategy for total unsecured loans. Growth in this segment could moderate to 20-30% next fiscal compared to ~45% in fiscal 2023.
It emphasized that on the financing side, part of bank loans has been on a growing trend in recent years. Over the last five fiscals, bank loans to NBFCs registered a compound annual growth rate of 18% and stood at Rs 12.3 lakh crore in September 2023, against Rs 5.5 lakh crore in September 2018. And the recent regulatory measures have focused attention on this tendency.
“Overall, the NBFC sector is on a strong wicket to exploit consumption-linked growth opportunities in the medium term despite competition from banks,” it said.