Non-bank financial companies have increased their share in total credit to more than one-fourth now from a share of only one-sixth a decade ago, Infomerics rating agency has said.
As per an analysis done by the rating agency, between September 2022 and September 2023, the NBFC sector experienced a significant upward trend in credit growth, with gross advances increasing by 20.8% versus 10.8% a year ago.
“This growth was predominantly driven by a substantial rise in personal loans, which grew by 32.5%, and lending to the agriculture industry, which saw a 43.7% increase,” Infomerics Ratings said.
Over the past four years, the personal loans category surged by a compound annual growth rate (CAGR) of 33%, significantly outpacing the overall credit growth of nearly 15%.
Recent adjustments in risk weights for certain categories of retail loans are likely to impact the trajectory of credit growth within the sector, the agency said.
The RBI increased risk weights on unsecured consumer credit and bank credit to NBFCs on November 16, 2023, to pre-empt buildup of any potential risk in these segments.
Consequently, credit growth in unsecured personal loans, such as, ‘credit card outstanding’ declined from 34.2% in November 2023 to 23% in April 2024, while bank credit growth to NBFCs declined from 21.5% in November 2023 to 14.6%.
In the last quarter of FY24, Scheduled Commercial Banks (SCBs) in India saw a 19.3% year-on-year growth in credit offtake, reaching Rs 164.3 lakh crore, driven by increased personal loans, lending to NBFCs, and recent HDFC merger.
The outstanding bank credit to NBFCs stood at Rs 15.54 lakh crore in April 2024. Bank funding to NBFCs grew by 14.6% on year in April 2024, compared to 29.2% in April 2023, according to the RBI data.
“The increase in capital expenditure should compensate for the reduced growth in bank funding to NBFCs – a key driver of corporate credit – due to the 25 percentage points higher risk weight on lending to higher-rated NBFCs,” the agency said.
In the financial year 2023, the industrial sector was the largest recipient of credit from the NBFC sector, followed by the retail and services sectors.
“NBFCs have grown increasingly interconnected with banks, which can amplify systemic risks, particularly during periods of financial stress,” the agency said. “One major issue is the concentration and contagion risks associated with being large net borrowers, particularly with high exposure to banks.”
By leveraging technology, NBFCs have expedited and streamlined their credit delivery processes, positioning themselves as a preferred option for multiple individuals, groups and companies. However, this rapid expansion has also introduced systemic risks, prompting increased engagement and oversight from the Reserve Bank of India (RBI).
NBFCs have demonstrated strong financial health, similar to the banking sector. As of the end of March 2024, the gross non-performing assets (GNPAs) of both scheduled commercial banks (SCBs) and NBFCs were below 3% of total advances.
