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Mumbai: India’s non-bank lenders are expected to see a 13-14% growth in their assets under management (AUM) in FY24, or twice the 7% pace logged in 2021-22, on the back of robust credit demand stemming from the ongoing economic rebound, Crisil Ratings Ltd said on Wednesday.

Gurpreet Chhatwal, managing director, Crisil Ratings said that stronger balance sheets, receding asset-quality concerns and steadily normalizing funding access provide a solid foundation for non-banking financial companies (NBFCs) to capitalize on credit demand.

Competition from banks will remain intense and the rising interest rate environment will exert pressure on margins and limit competitive ability, especially in the largest traditional segments of home loans and new vehicle finance, Chhatwal said.

“Hence, diversification into higher-yielding segments such as unsecured loans, used-vehicle loans, and secured SME loans will be the focus areas for the larger NBFCs," he said.

In home loans, the biggest segment comprising 40-45% of the NBFC AUM, structural factors driving end-user housing demand are intact despite the impact of rising real estate prices and interest rates, the rating agency said.

That, it said, should drive 13-15% growth in the segment next fiscal.

“But housing finance companies could keep losing market share to banks amid intense competition on interest rates, especially in the urban and the formal salaried segments. Rising rates will also lift the borrowing cost of NBFCs and lower their competitiveness versus banks, which have access to lower cost funds," it said.

Vehicle finance, the second-largest segment, with 20-25% of NBFC AUM, will grow 13-14% next fiscal compared with an estimated 12% this fiscal on the back of solid underlying-asset sales, it said.

According to Crisil, strong pent-up demand and new launches will continue to drive car and utility vehicle sales. The ongoing rebound in economic activity, demand for fleet replacement, and focus on last-mile connectivity will support commercial vehicle sales. In the new-vehicle finance segment, especially cars, interest-rate sensitivity of borrowers is high so competition from banks remains tough given their ability to offer finer pricing.

“Consequently, NBFCs are expected to capitalize on their core strengths of last-mile connectivity, customer relationships, innovativeness and strong understanding of micro markets to sharpen focus on used-vehicle financing, which offers higher yields and better profitability from a risk-adjusted return perspective," it said.

The rating agency said that unsecured loan -- 8-10% of NBFC AUM -- is the cynosure for many large NBFCs. A Crisil Ratings analysis showed disbursements doubled on-year last fiscal and grew further by 50% on an annualized basis, in the first half of this fiscal. Demand for consumer loans is high across durables, travel and other personal consumption activities, while business loans have benefited from macroeconomic tailwinds, it said, adding that the assets under management in this segment is seen growing 20-22% next fiscal.

Krishnan Sitaraman, senior director and deputy chief ratings officer, Crisil Ratings said that as large NBFCs turn towards non-traditional segments to enhance yields, there are likely to be more partnerships such as co-lending with emerging NBFCs focusing on specific asset classes, especially unsecured loans.

“This allows the large NBFCs to expand to newer domains in a more cost-efficient manner while reducing time-to-market. For emerging NBFCs, this supports capital-efficient AUM growth," said Sitaraman.

Overall, the rating agency believes that the NBFC sector is well poised to tap growth opportunities in the medium term despite competition from banks. However, geopolitical issues, sharper-than-expected increase in interest rates, and inflation will bear watching.

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