NBFCs’ profitability will moderate somewhat in the next 12-18 months as funding costs for them will increase according to ratings firm Moody’s. but the loans extended by them will increase by 15 percent during the period, it said.
“ We expect loans at NBFCs to grow about 15% in the next 12-18 months, driven by various types of lending, including infrastructure financing by large government-owned NBFCs and loans to small and medium-sized enterprises” Moody’s said in a report. “We also expect the sector’s credit costs to increase from cyclically low levels, especially as unsecured loans mature”.
Growth in unsecured retail loans is expected to slow after the Reserve Bank of India (RBI) raised the risk weight of such credit assets for both banks and NBFCs by 25 percentage points in December 2023.
Borrowing from banks, a key funding source for NBFCs has become costlier for the sector since the RBI raised the risk weight of banks’ exposures to the sector for the calculation of their regulatory capital. The measure has led banks to raise rates for loans to NBFCs to compensate for greater capital charges. Funding costs for large NBFCs increased about 50 basis points on average in fiscal 2024 from the prior year, Moodys said.
Still, rapid growth in unsecured loans in recent years poses asset risks for NBFCs as sizable proportions of their loans are new and are untested through economic cycles according to the ratings firm.
According to the central bank’s latest Financial Stability Report published in December 2023, 7.3 percent of NBFC customers with personal loans of less than Rs 50,000 had at least one overdue loan, and 8.2percent of NBFCs’ personal loans became delinquent within a year of origination.
Despite rising funding costs, strong credit demand fueled by the country’s robust economic growth will support the sector’s profitability, according to Moody’s. Also, robust economic conditions will help them preserve their asset quality even as rises in interest rates increase the debt burdens of their customers.
