The growth of NBFC assets under management (AUM) to ease to 13-15% in the current fiscal from 18% in the previous financial year, impacted by regulatory measures restricting bank lending, according to rating agency ICRA. The asset under management (AUM) of the sector is expected to cross Rs 50 trillion in FY2025 from Rs 47 trillion in March 2024.
Key challenges for meeting growth expectations would be in accessing the required debt funding over and above the refinancing of existing debt. The NBFC sector will require around Rs 5.6-6 trillion funds in the current fiscal year to meet the AUM growth of 13-15%.
“The banking sector, a key lender to the NBFC segment, is expected to register an overall credit expansion of around 12% in FY2025, resulting in an incremental bank credit of about Rs 19-20.5 trillion which is lower than the Rs 22 trillion credit expansion in the last fiscal,” said A M Karthik, senior vice-president & co-Group head Financial Sector Ratings, ICRA. “Further, the impact of tightening regulatory norms for bank funding to the sector is already visible over the last few months,” he said.
He added that incremental direct bank credit to the NBFCs in the first quarter of FY2025 was a modest Rs 7,500 crore compared to Rs 92,000 crore in the first quarter of FY2024.
Slowing direct bank credit will push the NBFCs towards capital market instruments. However, banks are one of the largest participants and are by far the largest subscribers of the securitisation and loan sell-downs by the NBFCs. Deposit challenges faced by banks and the push for the NBFCs to diversify their borrowing profile are likely to see the weighted average cost of funds projected to increase by 20-40bps over the FY2024 levels.
The overall loan quality of retail assets held by NBFCs, excluding housing finance companies, is expected to fall by 30–50 basis points in the current financial year. The elevated cost of funds, increased competitive pressures from banks, slowing growth and asset quality challenges would result in weakening profitability for the NBFCs, which is expected to decline by 25-45 bps. Notwithstanding these near-term pressures, ICRA notes that the sector is adequately capitalised, which upholds its risk profile, and ICRA, therefore, foresees a Stable outlook for the sector.