NBFCs must focus on diversification of products, funding profile, says Crisil

Mumbai: Non-banking financial companies (NBFCs) will have to focus on diversifying product offerings and funding profiles, given that growth in assets under management (AUM) is expected to moderate next fiscal, Crisil Ratings said on Wednesday.

As per Crisil, non-bank AUM will likely grow 14-17% in FY25, on the back of continued strong credit demand across retail loan segments, but less than the 16-18% expansion expected in the current fiscal (FY24). 

The slowdown is partly due to an anticipated deceleration in unsecured retail loans, which have previously been the fastest-growing segment for NBFCs, as they recalibrate their strategies following recent regulatory measures issued by the Reserve Bank of India (RBI), the Crisil note said.

“Product diversification will be a key agenda for NBFCs whose core competence lies in the ability to reach, underwrite and cater to difficult-to-address customer segments. The diversification is expected to be through a mix of organic, inorganic and partnership routes,” said Krishnan Sitaraman, senior director and chief ratings officer, Crisil Ratings.

RBI governor Shaktikanta Das on Wednesday advised NBFCs to lessen their reliance on bank borrowing, which has seen a compound annual growth rate of 18% over the last five years and and stood at ₹12.3 trillion as of September. Crisil noted that strategic co-lending and debt capital funding would be crucial for NBFCs to secure stable funding.

Meanwhile, RBI governor Shaktikanta Das said at an event on Wednesday that NBFCs should try to broadbase their funding sources and reduce overdependence on banks. As per Crisil, the share of bank borrowings has been increasing in recent years, and over the last five fiscals, bank loans to NBFCs logged a compound annual growth rate (CAGR) of 18% and stood at ₹12.3 trillion as of September.

“To ensure access to consistent and stable funding, we expect NBFCs to consciously diversify their resource mix and increase share of avenues like securitisation and debt capital funding. Focus on co-lending and direct assignments for capital-efficient growth is expected to continue,” said Sitaraman of Crisil.

Last week, RBI raised risk weights on personal loans, credit cards and bank loans to non-banks, a move expected to impact non-bank financiers more.

“The recent regulatory measures are targeted at unsecured retail loans and do not impact the secured asset classes where growth is expected to be steady. Importantly, the regulatory changes do not impact HFCs (housing finance companies),” said Gurpreet Chhatwal, managing director, Crisil Ratings.

As per Crisil, the two largest traditional segments of home loans and vehicle finance now comprise 25-27% each of the NBFC AUM. Both segments are expected to report steady growth. 

In the home loan segment, growth of 12-14% next fiscal will be driven by housing finance companies' focus on affordable home loans — ticket sizes of less than ₹25 lakh — while vehicle finance is expected to grow 18-19% this fiscal and 17-18% next fiscal, on the back of solid underlying asset sales, the Crisil note said.