Non-banking financial companies (NBFC) are likely to make a comeback on the hopes of 11-12% growth in their total assets under management (AUM) by the end of the current financial year. The sector saw a slowdown between FY20 and FY22 with their AUM growing at a modest 2-4%, rating agency Crisil said in a report.
Expansion in their AUM will be mainly led by the vehicle finance segment, which is expected to grow in the range of 11-13% in FY23. The segment contributes 45-50% to the total AUM of NBFCs. Within vehicle finance, used vehicle loans will drive the growth, the report said. “Strong demand from the infrastructure sector as well as demand for fleet replacement and focus on last-mile connectivity will buoy commercial vehicle sales while pent-up demand and new launches will drive car and utility vehicle sales,” the agency said.
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However, NBFCs will face competition from banks and higher interest rates will weigh on their growth in the new vehicle finance segment. The banking sector vehicle loans grew 19% on year in July with a total outstanding of Rs 4.4 trillion as of July 29, data from the Reserve Bank of India (RBI) shows. Banks’ vehicle loans comprise around 12% of the total personal loans.
“Even as growth touches double digits again, it will be lower than the pre-pandemic level. Intense competition from banks and the rising interest rate scenario will limit the competitiveness of NBFCs in certain segments, leading them to focus on higher-yield segments for growth,” Krishnan Sitarman, senior director and deputy chief ratings officer at the rating agency, said.
NBFC loan growth is also expected to come from other segments like personal loans, consumer durable loans, loans to SMEs, property and gold loans. Consumer loans are seen supported by rising retail spend across consumer durables, travel, and other personal consumption activities, while business loans will benefit from macroeconomic tailwinds. Loan against property (LAP) and gold loan segments are also expected to touch 10-12% growth supported by demand from small businesses and individuals, the report said.
“With NBFCs focusing on higher-yield segments, unsecured loans, which have the second-largest share (16-20%) in the NBFC AUM pie, may be the only segment to touch the pre-covid era growth of 20-22% this fiscal,” Ajit Velonie, director at the agency said. However, wholesale lending business is likely to decline in terms of AUM as NBFCs remain risk averse, the report said, adding that some NBFCs earlier exited the business to focus on retail lending. Earlier this year, L&T Finance, and prior to that Edelweiss Financial Services, had announced their exit from wholesale lending in the wake of the IL&FS insolvency crisis in the non-banking sector.