Global economic uncertainties arrive from a variety of factors, including geopolitical tensions, inflation, interest rate fluctuations, trade disruptions, and financial market volatility, and interestingly, India’s NBFCs, as a sector, have been relatively insulated from these. The NBFC sector has maintained double digit credit growth, supported by adequate capital levels and healthy delinquency trends, stated a report by Nomura. “While the sector has demonstrated stability, unsecured personal loans have been a key area of concern over the past year. Rising delinquencies in FY24 led to higher risk weights on unsecured loans, tightening liquidity for lenders. RBI intervention slowed excessive risk-taking, pushing lenders to adopt stricter underwriting,” the brokerage firm said.
Why asset quality and growth should improve?
With the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) announcing a 25 bps rate cut in February and also liquidity infusion by the central bank, Nomura said, borrowing costs for NBFCs should lower, enabling them to price loans more efficiently. “With improving borrower profile, fiscal stimulus, loosening monetary stance and a more disciplined lending approach, the unsecured segment is positioned for better risk-adjusted growth, in our view. While risk weights for this segment have not been reduced yet, incrementally improving trends in the sector could drive regulatory relaxations,” the analysis report by Nomura maintained.
In the report, Nomura took stock of the trends in Q3FY25 associated with the unsecured personal, consumer and digital loans (PL) portfolio of 13 large NBFCs, which constitute around 54 per cent of the overall NBFC sector’s personal loan outstanding.
Unsecured personal loan growth slows, but NBFCs maintain strong momentum
Overall, unsecured personal loan growth for the system, including NBFCs, moderated to around 16 per cent YoY in Q3FY25 vs approximately 23 per cent/ 31 per cent YoY in FY24/FY23.
While growth moderation is visible across the lender set, Nomura maintained, NBFCs are still growing faster than system/banks. While NBFCs saw a growth of around 6 per cent QoQ, banks witnessed a 4 per cent growth in Q3, leading to further market share gains for NBFCs in personal loans.
Furthermore, during FY22- Q3FY25, NBFCs’ unsecured loans grew approximately 2.6x vs 1.8x for the overall system, leading to market share gains in the system-level PL portfolio (~24 per cent in Q3FY25 vs 22 per cent/ 17 per cent in FY24/FY22).
Disbursement trends
According to bureau data (CIRF), system disbursement growth (value) in PL fell to -5.5 per cent YoY in H1FY25 (~25 per cent CAGR during FY22-24). “NBFCs’ disbursement growth (in value terms) was the highest with their market share rising to ~38.7 per cent in H1FY25 (from ~33 per cent as of FY24). In absolute terms too, market share of NBFCs in disbursements rose to ~90.7 per cent in H125 (vs ~86.6 per cent in FY24),” Nomura said.
NBFCs continue to disburse small-ticket-size loans in high volumes
System-disbursement ticket size in PL further fell to Rs 58k in H1FY24 (Rs 65k in FY24) with NBFCs’ disbursement ticket size being only around Rs 25k in H1FY24 (Rs 575k/ 370k for PSU/private banks).
Furthermore, the share of <Rs 50k PL disbursements (value) increased further in the mix to 10.5 per cent in H1FY24 (vs 9.6 per cent in FY24) with contribution in volume terms being high at ~84 per cent in H1FY24.
Unsecured loans up for select NBFCs
“The trends at individual NBFCs suggest that Poonawalla Fincorp (personal/consumer loans), CIFC (Neutral) (consumer & small enterprise loans), M&M Financial Services (MMFS IN, Reduce) (personal/consumer/TA loans), IIFL Finance (digital loans), Krazybee (unlisted) (personal loans) and Bajaj Finance (BAF IN, Buy) (rural/urban B2C) grew their PL portfolio the most in Q3FY25. During FY22-Q3FY25, Piramal Enterprise (PIEL IN, Not rated) (personal/digital loans), Poonawalla Fincorp (personal/consumer loans), and CIFC (consumer and small enterprise loans) grew their PL book by ~52x, 33x, and 26x, respectively. Even Krazybee (unlisted) (personal loans), Navi Finserv (unlisted) (personal loans), Aditya Birla Finance (ABCAP IN, Not rated) (personal/consumer loans), L&T Finance (LTFH IN, Not rated) (consumer loans) recorded personal loan portfolio growth of ~3-5x during FY22-Q3FY25,” Nomura said.
Further increase in share of unsecured PLs in NBFCs’ loan mix; unsecured PL as a percentage of net-worth is >100 per cent for select NBFCs.
The total AUM of these 13 NBFCs, Nomura said, registered growth of 20 per cent YoY in Q3FY25, of which the PL portfolio grew at a faster pace of 26 per cent YoY in Q3FY25, leading to an increase in the PL share to ~16 per cent in the AUM mix in Q3FY25 vs ~11 per cent in FY22.
Delinquencies rose in Q3FY25
Based on bureau data, late delinquencies (PAR90+) for system-PL inched up in H1FY24 to 5.2 per cent from 5.1 per cent in FY24. Looking at individual NBFCs, BAF, CIFC and Piramal saw an increase in GS-3 in personal loans in Q3FY25. Fin-techs observed similar trends in Q3FY25 as well. “However, the rate of increase in GS3 and credit costs has sharply slowed down and with improving economic conditions, we expect the sector to start showing green shoots of revival. Credit cost for NBFCs, especially the ones which have significant presence in unsecured PL/credit cards/MFI, will be the key variable to watch out for in Q4FY25 results,” Nomura concluded.