MUMBAI: The slew of regulatory curbs on individual players along with broader measures at the sectoral level, including asking banks to set aside higher risk capital for their loans to shadow banks since last November 2023, have begun to show up with their loan growth losing momentum this fiscal and is likely to go down further to 15-17 per cent this fiscal and the next.
According to a Crisil Ratings analysis, non-bank loan growth is set to moderate to 15-17% in the current and the next fiscals, a 600-800 basis points (bps) decline from a strong 23 per cent growth last fiscal, as they navigate the dynamics of the evolving operating and regulatory environments and recalibrate strategies.
While the expected growth will still be above the decadal average of 14 per cent seen in fiscals 2014-24, Crisil said on Monday, it will moderate from the fiscal 2024 level on account of three factors.
First, rising concerns around household indebtedness and asset quality risks will have a bearing on growth strategies in specific retail asset segments such as microfinance and unsecured loans.
Secondly, the agency said regulatory compliance requirements have intensified with a focus sharpening on customer protection, pricing disclosures and operational compliance which will necessitate process recalibration.
Finally, access to diversified funding sources, a crucial determinant of growth, especially given the slowdown in bank lending to NBFCs, will differ across NBFCs. Bank lending to NBFCs has shrunk by 70 bps to Rs 1.7 trillion in the first seven months of the current fiscal.
Loan growth of NBFCs in the two largest traditional segments— home and vehicle loans (45 per cent of their assets)-- will continue to be driven by fundamentals with limited impact of the above factors.
Home loans are expected to maintain steady growth of 13-14 per cent. Policy initiatives, such as the re-introduction of the interest subsidy scheme, will provide impetus. Housing finance companies focused on the affordable segment are likely to grow faster at 22-23 per cent.
Growth in vehicle finance is estimated to moderate but remains healthy at 15-16 per cent. While unit sales growth of new vehicles will be lower, the shift to higher-value vehicles and continued focus on used assets should provide an offset and support overall growth, the report said.
On the other hand, the unsecured loans and microfinance segments, accounting for 23 per cent of the overall NBFC loans, are expected to be impacted the most.
According to Krishnan Sitaraman, the chief rating officer at the agency, recent regulatory pronouncements have brought to the fore the criticality of compliance, both in letter and spirit and operational risk management.
Additionally, asset quality metrics have weakened in the past few quarters in some segments. This has necessitated a recalibration of growth strategies, especially in unsecured loans and microfinance.
Unsecured lending clocked rapid growth in the past three fiscals at an annual rate of 45 per cent and has become the third-largest component of the overall NBFC assets. But that pace is seen moderating to 15-16 per cent in this and next fiscals. The microfinance segment is facing asset quality headwinds, so its growth is expected to be muted this fiscal, with a cautious recovery pencilled in for next fiscal. That compares with 25 per cent growth last fiscal.
Funding is an important factor that influences the growth of NBFCs. Bank lending to NBFCs, which has been largely supportive over the past five to six years, has remained in the range of Rs 13-13.5 trillion since November 2023 when regulatory risk weights were raised.
According to Ajit Velonie, a senior director with the agency, most of the large NBFCs have tapped alternative funding sources such as capital market instruments, forex borrowings and securitisation over the last three quarters. For the rest, the ability to continue tapping such sources at an optimal cost remains crucial to growth.