NBFC profitability could see a dip in FY25 over funding constraints, asset quality challenges: Icra

Non-Banking Financial Companies (NBFCs) may encounter funding challenges that could hinder their growth trajectory, resulting in a slower expansion compared to the robust progress witnessed in the last two fiscal years, ratings firm Icra said in a report. 

The report stated that the growth of NBFCs' assets under management (AUM) is likely to decelerate to a range of 13–15 per cent in the ongoing fiscal year. This projection marks a decline from the significant 18 per cent growth recorded in the preceding financial year, highlighting a potential slowdown in the sector's growth momentum.

It noted slowing direct bank credit in the market will push the NBFCs towards capital market instruments. However, banks are one of the largest participants and are by far the largest subscribers of the securitisation and loan sell-downs by the NBFCs.

In order to meet growth expectations successfully, one of the main challenges will be obtaining the essential debt funding needed, alongside refinancing current debts. The report suggests that an estimated incremental debt funding ranging from Rs 5.6 lakh crore to Rs 6 lakh crore will be necessary for the expansion of Assets Under Management (AUM) in the financial year 2025. 

The report further stated the AUM of the sector, valued at approximately Rs 47 trillion in March 2024, is predicted to surpass Rs 50 trillion in the ongoing financial year. 

The quality of retail assets held by NBFCs, excluding housing finance firms, is anticipated to witness a decline of 30–50 basis points in the current fiscal year. The sector's financial performance may be impacted by heightened funding costs, mounting competition from banks, decelerating growth, and challenges related to asset quality. The report has also highlighted that the sector's profit margins are expected to decrease by 25–45 basis points compared to the preceding year.

Although there is high demand and unfulfilled credit requirements, there is a notable risk that the growth of NBFC AUM may slow down significantly if the stringent funding conditions from the initial quarter of the ongoing financial year persist throughout the year.

“The banking sector, a key lender to the NBFC segment, is expected to register an overall credit expansion of around 12% in FY2025, resulting in an incremental bank credit of about Rs. 19.0-20.5 trillion" said A M Karthik, senior vice president & co-group head financial Sector Ratings, Icra . 

"This, however, is lower than the Rs. 22 trillion credit expansion in the last fiscal. Further, the impact of tightening regulatory norms for bank funding to the sector, is already visible over the last few months. Incremental direct bank credit to the NBFCs in Q1FY2025 was a modest Rs. 75 billion compared to Rs. 920 billion in Q1 FY2024,” Karthik added. 

ICRA emphasised that due to slower growth and the maturing of portfolios resulting from the swift credit expansion in retail assets during the previous two fiscal years, there will be a noticeable impact on asset quality starting this year. Furthermore, there are worries about excessive leverage and the rising proportion of unsecured loans, which are likely to raise credit risk levels, ultimately posing a greater danger to the quality of loans within the sector.