New Delhi [India], January 24 : India's large non-bank financial institutions (NBFIs) are better positioned to weather economic and regulatory challenges compared to their smaller counterparts, according to Fitch Ratings.
While softer economic conditions, tighter bank funding, and asset quality concerns are expected to affect the sector's credit growth and profitability in the near term, larger NBFIs with robust operations and diversified funding channels are expected to maintain steadier performance.
The NBFI sector's loan growth has decelerated from the high of 18 per cent recorded in the fiscal year ending March 2024 (FY24). Credit growth for NBFIs, excluding housing finance companies, moderated to 6.6 per cent between March and September 2024.
This slowdown is partially attributed to weaker economic growth. Fitch revised its FY25 GDP growth forecast to 6.4 per cent in December 2024, down from 7.0 per cent, although the outlook for FY26 remains stable at 6.5 per cent.
Regulatory tightening has also impacted the sector, raising the cost of capital and increasing compliance requirements. Measures introduced in the past 18 months include higher risk weights on bank lending to NBFIs and unsecured loans, as well as stricter rules on gold-backed loans and microfinance.
Mid-sized and smaller NBFIs may face greater difficulties due to concentrated portfolios and limited access to funding. Regulatory enforcement, such as restrictions on new business activities, could further constrain their growth.
Additionally, rising delinquencies in unsecured lending segments, such as microfinance and personal loans, have prompted lenders to tighten underwriting standards.
Microfinance disbursements fell by 10 per cent year-on-year in the second quarter of FY25, with the sector's delinquency ratio increasing to 3.8 per cent in September 2024, from 3.0 per cent in June 2024. Smaller NBFIs are expected to remain cautious as they adjust to these challenges.
Larger NBFIs are better equipped to navigate the current environment. They are expected to sustain mid-to-high-teen credit growth in the coming years, supported by their established operations and access to diverse funding sources, including portfolio securitisation and offshore borrowing.
Segments such as business loans against property and new commercial vehicle loans may experience softer demand, but robust collateral coverage and improved recovery processes should help maintain asset quality. Gold and housing loans are likely to remain resilient to economic headwinds.
The cost of funding is unlikely to ease significantly, with bank lending rates remaining high. Bank lending to NBFIs slowed to 8.5 per cent year-on-year by November 2024, compared to 21 per cent a year earlier. However, local mutual funds have increased their subscriptions to NBFI debt, rising by 51 per cent year-on-year in November 2024.
While larger NBFIs continue to expand their funding sources, smaller players are expected to encounter challenges in sustaining growth and profitability in the current environment.
The near-term outlook for India's NBFI sector remains mixed. While larger players are expected to demonstrate resilience, smaller and mid-sized NBFIs may face hurdles due to regulatory changes, funding challenges, and economic headwinds. However, the sector's long-term prospects remain tied to broader economic stability and regulatory developments.