Assets under management (AUM) of non-banking financial companies (NBFCs) are set to log a healthy 14-17% growth next fiscal on the back of continued strong credit demand across retail loan segments, global rating agency CRISIL said in its recent report.
Growth may be moderately lower than 16-18% 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 as NBFCs recalibrate their strategies due to the recent regulatory measures issued by the Reserve Bank of India (RBI), it highlighted.
“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, Managing Director, CRISIL Ratings.
“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,” he added.
Going forward, diversification in product offerings and funding profile will be key constituents of their growth strategy.
The increase in risk weights for unsecured retail loans to 125% from 100% will result in a decrease in capital adequacy ratio (CAR), linked to the share of unsecured retail loans in overall AUM.
It is to be noted that RBI has decided that the consumer credit exposure of NBFCs – outstanding as well as new – categorised as retail loans, excluding housing loans, educational loans, vehicle loans, loans against gold jewellery and microfinance/SHG loans, shall attract a risk weight of 125%. NBFCs’ loan exposures generally attract a risk weight of 100%.
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However, CRISIL Ratings’ analysis indicates that unsecured retail loans contribute only 12-14% to the NBFC sector AUM pie, while the balance comes from secured asset classes such as housing, vehicle, SME and gold loans, where risk weights remain at 100% or lower.
The impact on CAR is expected to be less than 75 bps for most NBFCs. For a few whose share of unsecured retail loans is over half their loan book, the impact is higher but manageable as they are either backed by strong parentage or have existing buffers in CAR.
Bank loan borrowing costs for NBFCs could increase
As per CRISIL Ratings’ estimates, bank loan borrowing costs for NBFCs could increase 25-50 bps. However, its impact on the balance sheets of NBFCs will be lower and linked to the extent of their reliance on bank funding.
The move to increase in risk weights for bank exposure to NBFCs by 25% points for NBFCs rated in the ‘A’ category and above will tend banks to maintain higher capital on loans to such NBFCs. This may have an impact on funding profile and borrowing costs of NBFCs as banks could increase interest rates to offset the higher cost of capital.
RBI had announced increase of risk weights on exposures of SCBs to NBFCs by 25% points, over and above the risk weight associated with the given external rating, in all cases where the extant risk weight as per external rating of NBFCs is below 100%.
CRISIL also highlighted that banks could reassess their lending limits for the NBFC sector while NBFCs could adopt a more calibrated growth strategy for overall unsecured loans. Growth in this segment could moderate to 20-30% next fiscal as compared with ~45% in fiscal 2023.
It highlighted that on the funding side, share of banking borrowings has been on an increasing trend in recent years. Over the last five fiscals, bank loans to NBFCs logged a compound annual growth rate of 18% and stood at Rs 12.3 lakh crore as of September 2023, against Rs 5.5 lakh crore as of September 2018. And the recent regulatory measures have focused attention to this trend.
“Overall, the NBFC sector is on a strong wicket to tap consumption-linked growth opportunities over the medium term despite competition from banks,” it said.
