Credit rating agency ICRA has sounded a cautionary note on unsecured loans of non banking finance companies (NBFCs), even as it sees 25-30 per cent growth in assets under management (AUM) of the shadow banks in FY24 and FY25.
The rating firm underscored that the high growth observed in the past and the expected AUM expansion in the future could pose challenges, particularly in maintaining portfolio seasoning at low levels. The report points out that long-tail loans, including affordable housing and secured business loans, are especially susceptible.
“High growth in the past and the expected AUM expansion going forward, shall keep the portfolio seasoning at low levels, especially for the long-tail loans, namely affordable housing and secured business loans,” it said in a report.
While the reported Gross Stage 3 assets for entities assessed by ICRA was manageable at 2.6 per cent in March 2023, the report acknowledges the need for ongoing scrutiny. This aspect, according to ICRA, is an improvement from the 4.2 per cent reported in March 2022.
The same is lower than the levels reported by larger players – a sample of 39 entities considered for ICRA’s analysis, driven by write-offs and faster AUM growth, it said.
Digital lenders’ losses
However, digital lenders in the sample set reported higher loan losses, with the write-offs standing at 9-10 per cent in the last two fiscals.
“Entities in the unsecured loan segments would be required to raise capital in the next 12-18 months to keep their leverage under control,” he added.
ICRA highlights that entities focusing on unsecured loans may need to raise capital in the next 12-18 months to maintain control over leverage. The report emphasises the importance of financial institutions proactively managing their capital positions to navigate potential challenges in the unsecured lending space.
The report also projected debt funding for medium and small NBFCs at Rs 2.2 lakh crore over the next two years (FY24 and FY25). This projection aligns with the anticipated growth in AUMs within the industry. ICRA sheds light on the changing dynamics of borrowing profiles, with bank loans and loans from financial institutions dominating, while Non-Convertible Debentures (NCDs) have seen a decline to 20%, reflecting tightening in capital markets.
Co-lending has emerged as a crucial source of funding for medium and small NBFCs, constituting nearly 28-30% of off-balance sheet exposure as of March 2023. The report observed that this collaborative approach is expected to gain momentum in specific segments, including vehicle loans, home loans, and Loan Against Property (LAP) SMEs over the medium term.
