
Non-Banking Financial Companies (NBFCs) have become vital players in the financial sector, particularly in business lending. Their contributions to financial inclusion and economic growth make them significant components of the financial ecosystem.
Steady Growth and Market Penetration
Retail AUM Expansion: NBFCs, excluding Housing Finance Companies, experienced a 29% year-over-year (YoY) increase in Retail Assets Under Management (AUM) by Q2 FY2024. ICRA forecasts a growth rate of 21-23% for FY2024, which, although slightly lower than the first half, remains strong compared to the high growth baseline of FY2023. This growth underscores the increasing reliance on NBFCs for diverse financial needs, reflecting their expanding role in the financial landscape.
Key Growth Drivers
Unsecured Loans: Growth in unsecured segments such as Personal Loans, Consumer Loans, SME loans, and Microfinance Institution loans has been notable. However, regulatory measures are expected to slow the growth of Personal and Consumer Loans in H2 FY2024 and FY2025. These measures are intended to ensure sustainable growth and mitigate potential risks associated with rapid expansion in these loan segments.
Secured Loans: Secured NBFC-Retail AUM, which includes Vehicle Financing, Gold Loans, and Small Business Loans, is projected to grow by 18-20% in FY2024 and 16-18% in FY2025, indicating steady demand in these areas.
Funding and Liquidity
Funding Needs: NBFCs will require around Rs. 3.0 trillion annually in FY2024 and FY2025 for incremental funding. With limited bank credit, NBFCs will increasingly rely on market issuances and securitization to meet these funding needs.
Credit Costs and Profitability
Credit Costs: Credit costs are expected to rise in FY2025 due to increased provisions for loan growth and potential loan losses, reflecting a cautious approach to maintaining asset quality.
Cost of Funds and Profitability: The weighted average cost of funds (CoF) is expected to increase by 30-50 basis points (bps) in H2 FY2024 and 20-40 bps in FY2025. This, coupled with rising credit costs, may reduce net profitability by 20-40 bps in FY2025 compared to FY2024.
Capital and Regulatory Impact
Capitalization: NBFCs are likely to maintain adequate capitalization to support growth targets. Some may need to raise additional capital to comply with new regulatory requirements.
Financial Inclusion: A Catalyst for Growth
Empowering Through Financial Inclusion: Financial inclusion efforts by NBFCs have enabled underserved communities to improve their living standards and expand businesses, contributing to overall economic development.
Economic Impact
Driving Economic Growth: NBFCs provide essential credit to economically disadvantaged segments, fostering sustainable economic development. RBI initiatives, such as the Pradhan Mantri Jan Dhan Yojana, highlight the importance of extending financial services to all citizens.\
Aligning with Sustainable Development Goals (SDGs): Efforts in financial inclusion align with Sustainable Development Goals (SDGs), supporting poverty reduction, enhancing gender equality, and promoting economic growth.
Conclusion
NBFCs have played a significant role in business lending by offering flexible and inclusive financial services. Despite facing challenges such as regulatory changes and liquidity constraints, NBFCs continue to support SMEs, underserved segments, and broader economic growth. Their adaptability and innovative approaches make them crucial contributors to the financial sector, complementing traditional banking institutions. As NBFCs navigate the evolving financial landscape, their role in fostering economic resilience and inclusivity remains indispensable.