Non-banking financial companies (NBFC) must take a calibrated approach while providing asset and liability support to fintechs as the end-use of these loans largely remains consumption based where, overleveraging by borrowers can be a large risk, says India Ratings and Research.
The rating agency’s view comes when non-bank lenders are increasingly partnering with fintechs to disburse unsecured loans.
“Also, all lenders providing balance sheet to few large originators could pose a cascading risk if the funding environment for fintechs turns tighter on asset quality concerns,” the rating agency said in a press release on Wednesday.
The net interest margin of non-bank lenders are expected to fall by 20-25 basis points year-on-year(y-o-y) in 2023-24(April-March) as non-bank lenders will be unable to completely pass-on increases in borrowing cost in the second half of this financial year.
These NBFCs can be further hindered by the fact that they are facing stiff competition from banks and small finance banks in the secured loan segment.
NBFCs could look to partially offset the margin pressure by opportunistically increasing their short-term borrowings through commercial papers, largely in accordance with the proportion of short-term assets in the balance sheet, thereby managing asset-liability tenors.
Also, large well-diversified NBFCs could shift towards public debentures to enhance granularity in the overall funding mix, in view of the muted demand for long-duration bonds from mutual funds, according to India Ratings said.
While credit costs in 2023-24 are likely to largely remain at levels seen in 2022-23, stage 3 assets could marginally rise to around 3.8% from 3.5% in previous financial year.
The credit rating agency expects loan growth for NBFCs to be in the range of 15-16% Y-o-Y in 2023-24 coming on a higher base.
A few large NBFCs would raise capital in the second half of the current financial year as capital consumption has been higher due to the strong loan growth seen in 2022-23.
Also, some NBFCs are building significant capital base with an aim to widen their customer base through either acquisitions or entering into new product segments, while also investing in an expansion of their network, the rating agency said.