NBFCs Face Funding Strains, Slower Growth Ahead

Mumbai: Non-banking financial companies (NBFCs) are likely to face funding challenges that could result in slower growth compared to the robust expansion seen in the last two fiscals according to rating agency ICRA Ltd. The agency anticipates the growth of NBFC asset under management (AUM) to moderate to 13-15 per cent in FY2025 from 18 per cent in FY2024. Standing at about Rs 47 lakh crore in March 2024, the sector AUM is set to cross Rs 50 lakh crore in FY2025.

Key challenges for meeting growth expectations, however, would be in accessing the required debt funding over and above the refinancing of existing debt. The estimated incremental debt funding for AUM expansion is Rs 5.6 lakh crore to 6 lakh crore for FY2025. Notwithstanding the sizeable demand and unmet credit requirements, the downside risk to the indicated NBFC AUM growth would accentuate, if the tight funding environment, as witnessed in Q1 FY2025, continues for a prolonged period in the current fiscal.

“The banking sector, a key lender to the NBFC segment, is expected to register an overall credit expansion of around 12 per cent in FY2025, resulting in an incremental bank credit of about Rs 19 lakh crore to Rs 20.5 lakh crore. This, however, is lower than the Rs 22 lakh crore 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 Q1 FY2025 was a modest Rs 7500 crore compared to Rs 92000 crore in Q1 FY2024,” A M Karthik, Senior Vice President & Co-Group Head Financial Sector Ratings, ICRA Limited said.

Slowing direct bank credit 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. Deposit challenges faced by banks and the push for the NBFCs to diversify their borrowing profile are likely to see the weighted average cost of funds projected to increase by 20-40bps over the FY2024 levels.

The elevated cost of funds, increased competitive pressures from banks, slowing growth and asset quality challenge would result in weakening profitability for the NBFCs (excluding the HFCs and the NBFC-IFCs), which is expected to decline by 25-45 bps vis-à-vis FY2024 levels. The NBFC-HFCs and NBFC-IFCs would also be faced with margin pressures in view of the elevated funding costs, however, the impact may be lower than their peers in the sector.

ICRA expects the overall retail asset loan quality of the NBFCs, excluding housing finance companies (NBFC-HFCs), to weaken by 30-50 bps in the current fiscal. The NBFC-HFCs’ and the NBFC-Infrastructure Finance Companies’ (IFCs’) loan quality, however, shall remain range-bound with expectations of 10-20 bps improvement from March 2024 levels.