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The hike in the cost of funds is attributed to the continuous repricing of marginal cost of funds based lending rate (MCLR)-linked loans, even as the Reserve Bank of India has paused its policy rate changes.

As the current fiscal year unfolds, non-banking financial companies (NBFCs) in India are facing a challenging landscape characterized by a significant rise in the cost of funds and the need to diversify their funding sources. The cost of funds has increased by 10-15 basis points (bps) in the first quarter of the 2023-24 financial year (Q1FY24), with expectations of further rises, potentially peaking at 30-40 bps above Q1FY24 levels by Q3FY24. This upward trend may lead to earnings downgrades for NBFCs due to potential compression in net interest margin/net interest income (NIM/NII).

The hike in the cost of funds is attributed to the continuous repricing of marginal cost of funds based lending rate (MCLR)-linked loans, even as the Reserve Bank of India (RBI) has paused its policy rate changes. This has translated into higher borrowing costs for financial institutions, affecting their profitability.

Loan spurt

The NBFC-Retail sector, with an estimated asset under management (AUM) of approximately Rs 14 lakh crore as of March 2023, is poised for accelerated growth in FY24. Projections suggest an expansion of 18-20%, surpassing earlier estimates of 12-14%. This surge is primarily attributed to the robust performance of the unsecured loans segment, encompassing personal and consumption loans, unsecured small enterprise loans, and microfinance loans.

Conversely, the HFC-Retail AUM, totalling around Rs 7 lakh crore in March 2023, comprising home loans (HL) and loans against property (LAP), is expected to exhibit a more moderate growth rate of 12-14%, albeit higher than the previous projection of 11-13%. This moderation can be attributed to heightened competition from traditional banks in this sector.

The broader sector, encompassing both NBFC and HFC assets, including infrastructure loans, is anticipated to register a growth rate of 13-15% in FY24, with a cumulative AUM of approximately ₹40 lakh crore as of March 2023.

The NBFC-Retail segment demonstrated robust growth, with a 26% expansion in the previous fiscal year, driven primarily by the unsecured loans category, which witnessed a remarkable 44% growth.

Unsecured loans boost

Unsecured loans have been a key driver of this growth, boasting a Compound Annual Growth Rate (CAGR) of 27% over the five-year period ending in FY2023, surpassing the 11% CAGR of secured loans during the same period. This trend is expected to persist in the current fiscal year.

This growth in unsecured credit can be attributed, in part, to a shift toward a more borrower-focused approach by financial entities, departing from their previous product-centric strategies. The evolution of credit bureaus and enhanced insights into borrower-level cash flows have enabled NBFCs to refine their underwriting models. Additionally, the cross-selling of diverse loan products is being adopted to fortify customer engagement and retention.

  • Published On Sep 22, 2023 at 08:00 AM IST

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