Unsecured retail loans are likely to witness slower growth of 20-30 per cent in comparison to 45 per cent as non-banking financial companies (NBFC) alter their strategies due to the recent regulatory measures issued by the Reserve Bank of India, said Crisil Ratings. It further added, “Assets under management (AUM) of non-banking financial companies (NBFCs) are set to log a healthy 14-17 per cent growth next fiscal on the back of continued strong credit demand across retail loan segments. Growth may be moderately lower than 16-18 per cent expected in the current fiscal, as unsecured retail loans, the fastest growing segment in the NBFC AUM pie so far, are likely to see a relatively slower growth. Going forward, diversification in product offerings and funding profile will be key constituents of their growth strategy.”
Earlier on 16 November 2023, the RBI raised risk weights on riskier unsecured retail loans and credit cards by banks and non-bank finance companies (NBFCs) by 25 percentage points. Further, Bank credit to NBFCs also saw certain increases in risk weights. This comes in light of the high growth seen across consumer lending in the system, along with some concerns being highlighted on higher delinquencies in smaller ticket sized loans. “This move by the RBI improves capital buffers and puts caution in action, that bodes well for the asset quality cycle in the medium term, and ensures credit growth is met with higher risk awareness and financial stability,” said HDFC Asset Management Company Limited (HDFC AMC).
“The recent regulatory measures are targeted at unsecured retail loans and do not impact the secured asset classes where growth is expected to be steady. Importantly, the regulatory changes do not impact HFCs,” said Gurpreet Chhatwal, Managing Director, CRISIL Ratings.
According to a report by CareEdge, during the fiscal years 2017 to 2023, personal loan credit experienced robust growth of almost 1.5 times the overall credit growth observed in both Banks and Non-Banking Financial Companies (NBFCs). Within personal credit, unsecured personal loans outpaced the overall expansion of the personal loan book and constitute nearly one-third of the total personal loan segment loans. The trend, it added, has been further facilitated by the advent of Fintech and Digital channels, contributing to increased origination volumes. The emphasis on smaller ticket-size loans by NBFCs has been a significant driver of volume growth in the unsecured personal loan segment. “High growth in unsecured personal loans is driven by a multitude of factors with some of these factors being structural in nature, and hence, going forward, a relatively higher growth rate is likely to continue. However, the recent RBI notification, aimed at deterring high consumer credit growth, is expected to impact the momentum in growth in the immediate to near term.Although the asset quality has remained stable, there is a need for vigilant monitoring, particularly on small ticket size loans,” it said.
CRISIL added that in terms of segments, the two largest traditional segments of home loans and vehicle finance now comprise 25-27 per cent each of the NBFC AUM and both segments are expected to report steady growth. In the home loan segment, growth of 12-14 per cent next fiscal will be driven by HFCs’ focus on affordable home loans (ticket sizes of less than Rs 25 lakh), while vehicle finance is expected to grow 18-19 per cent this fiscal and sustain 17-18 per cent growth next fiscal on the back of solid underlying-asset sales. “Unsecured loans is now the third largest segment in the NBFC AUM pie. And this segment is likely to see a moderation in growth due to the regulatory measures which affect NBFC AUM growth on both their asset and liability sides on three fronts,” said Gurpreet Chhatwal.
Per the findings of a CareEdge Ratings’ Poll that assessed the potential impact on various lender categories in the event of unsecured personal loans turning sour, “Fintech NBFCs emerge as the most susceptible, with private sector banks, public sector banks, and other NBFCs following in decreasing order of potential impact. This underscores the need for a vigilant approach to risk management, especially for Fintech NBFCs, in navigating the challenges associated with the unsecured personal loan segment.”
CareEdge further added that the impact on NBFCs is expected to be twofold – 1) The RBI’s directive to increase risk weights by 25 per cent for advances to AAA to A-rated NBFCs is likely to prompt banks to adjust loan pricing. This adjustment is intended to partially cover the increased capital buffers mandated by the RBI, potentially leading to a moderation in the momentum of bank lending to NBFCs not covered by Priority Sector Lending (PSL) guidelines, especially affecting entities rated A- and above. 2) Additionally, RBI raising the risk weights on NBFCs’ unsecured personal loan exposure by 25 per cent is expected to impact the capital buffers of NBFCs. Consequently, there may be a slowdown in lending. Despite the anticipated rise in lending costs, mid and smaller-sized NBFCs are likely to have a high reliance on the banking sector for funding.
According to CareEdge Ratings, this situation is expected to result in a greater-than-normal increase in funding through securitization and co-lending partnerships, serving as alternative sources of liability for NBFCs.
Meanwhile, HDFC AMC said, “This move by RBI could have some impact on credit growth in the retail sector. However, with overall capital adequacy high, the immediate balance sheet impact is not very heavy at a sector level, while some players could need to increase capital buffers/ raise capital for further growth. While the outlook for credit growth remains strong, banking sector valuations are below average. This move by the RBI bodes well from a medium term perspective for asset quality and financial stability. RBI’s continuous monitoring of the financial system and proactive actions to protect financial stability further improve the outlook for macroeconomic stability for the economy as a whole.”