MUMBAI: The country’s non-banks are set to grow their loan book by a higher 21-22% this fiscal and the next, and grab more of the credit market share from banks, a foreign agency has said.
S&P Global Ratings in a report said Thursday, the NBFCs rated by them are on course to continue to grab the market share from banks as they are expected to grow their loan books by 21-22% over the next two years, higher than 11-12% for banks loan growth. Still, this is a moderation compared to the previous growth patterns, it added.
"Stricter underwriting standards for these finance companies will rein in growth plans and defuse risk buildup for this financial niche," said S&P credit analyst Geeta Chugh in a report.
It can be noted that S&P’s global rival Moody’s owned Icra Ratings had Wednesday forecast a tepid 15-17% loan growth for the NBFC sector while banks, they said, would add 10.3-11.5% more to their loan books this fiscal.
S&P said a key driver for the domestic NBFC sector is its strong presence in retail lending, which is still underpenetrated.
Upper-layer BFCs have strong capital levels which will support high loan growth and provide downside buffers, it Chugh said, adding they also expect earnings momentum to sustain, with slightly higher net interest margins over the next two years. This will add to the core capital buffer.
At the same time, some slowdown in certain products is likely to continue due to a stronger focus on risk management. This is reflected in improved underwriting--lending primarily to low-risk customers and with generally low loan approval rates.
Tighter regulatory supervision in some lending niches, including gold-backed loans, could also rein in asset expansion, she added.
"Asset quality is holding up, though some pockets of stress persist in microfinance and unsecured loans," she said, noting that this stress can be attributed to rapid growth and exuberant lending practices directed towards borrowers with weak credit profiles, without adequate consideration of their repayment capacity.
For instance, she said last fiscal, around 20% of microfinance borrowers held loans from four or more lenders. Unsurprisingly, these borrowers are currently experiencing significant financial stress. On an industry-wide basis, credit costs surged to around 9% last fiscal, and she anticipates this will exceed 5% this year as well.
Following the stress, the industry has been winding down turning down loan demand from overleveraged borrowers from last fiscal. These measures have already resulted in a 14% decline in the microfinance loans in FY25 and Chugh expects these safeguards will enhance asset quality, with stress anticipated to peak this year.
Similarly, unsecured personal loans, which was clipping at over 30% since the pandemic and up to November 2023 when the RBI clamped down by asking lenders to provide for 25 percentage more in risk capital, taking the requirement to 125%, till particularly small-ticket loans extended by fintech firms or below-prime unsecured loans with a higher risk appetite, have experienced increased leverage and delinquency rates.
The Reserve Bank measures coupled with tighter underwriting standards by lenders, have already led to sharp slowdown in the growth rate of unsecured personal loans to around 8-9% in FY25from over 20% in fiscal 2024. She expects loan losses in this segment to peak in fiscal 2026.