The funding strategy of non-banking financial companies (NBFCs) will continue to be in focus in FY25 as the recent risk weight norms has led to a rise in the cost of borrowings. In such a scenario, NBFCs would mobilise commercial papers (CPs) in a higher proportion, depending on the tenure of asset segments, according to India Ratings and Research.
They would also focus more on off-book tie-ups to increase franchisee, CP mobilisation, securitisation and an evenly balanced funding mobilisation from banks and capital markets during the year. With the expanding balance sheets, NBFCs would also keep looking for newer avenues (domestic and international) to raise funds.
“NBFCs would resort to more of retail issuances of debentures, which lend granularity to funding and diversify the investor base,” the India Ratings report said on Thursday.
The report added that NBFCs have also started to grow their franchisee in an asset-light manner by getting into co-lending and business correspondent arrangements with other lenders. This optimises the use of capital and enables non-bank lenders to report profitability without consuming capital.
The rating agency has maintained a neutral outlook for NBFCs for the year, factoring in continuation of growth, stable asset quality and adequate capital buffers, aided by the growth in economy. The rating agency expects the sector to grow 20% in FY25 compared to 27% in the current fiscal.
While NBFCs’ profit margins will remain under pressure, the overall profitability would be managed through driving efficiency in fee income, operating expenses and credit costs.
“As NBFCs’ balance sheet expanded at the fastest pace in FY24 driving scale, incremental funding requirement should be managed judiciously where capital markets and securitisation/direct assignments need to play a balancing act,” the report said.
In November, RBI also asked NBFCs to increase the risk weights on unsecured retail loans, and this has impacted growth rates among lenders having a sizeable share of unsecured lending in their overall assets under management.
In the last two financial years, unsecured lending has been a significant contributor to the overall growth in assets under management of non-bank lenders.
Going ahead, loan against property, commercial vehicle finance and business loans will continue growing, aided by improving property prices, rising vehicle price and a rise in working capital requirements, respectively.
Nevertheless, the rating agency remains watchful of the stress building up around fintechs in 2024-25.
“The partnerships with banks and NBFCs would require tweaking, operating leverage benefits would moderate, originations would slowdown, and funding through mobile applications would become a key monitorable,” the rating agency said.