Large private non-bank financial institutions (NBFIs) have gained significant market share relative to smaller counterparts in recent years. The loan market share of 17 large NBFIs tracked by Fitch Ratings rising to 38 per cent by September 2024 from 30 per cent in March 2022.

Fitch attributed larger NBFI’s performance to superior competitive positioning and a perception of better management quality and governance, which support their funding access and franchise growth.

Meanwhile, smaller NBFIs’ dependence on bank loans for funding have led to constraints during periods of tight banking system liquidity.

“Smaller firms also face higher entry and growth barriers due to escalating compliance and risk management costs. As a result, smaller players are ceding market share to larger counterparts, with the 17 Fitch-monitored NBFIs achieving a loan CAGR of 20 per cent from March 2022 to September 2024, compared to just 9 per cent for the overall NBFI sector,” said Fitch Ratings in its report ‘Indian NBFIs: Differentiated Credit Profiles’.

Fitch’s group of 17 includes some mid-sized NBFIs that are segment leaders or offshore bond issuers. Such companies may have scale advantages within their segment or other financial backing that help them overcome the disadvantages of other small lenders.

Segment Leaders Better Placed to Grow

The agency believes NBFIs with market leadership in a particular product are better placed to grow amid resilient credit demand, supported by their broader reach and operating efficiency. Their larger franchises and regional diversification enable them to navigate market disruptions more effectively.

“Notably, companies like Shriram, Muthoot and Bajaj Finance, leaders in used commercial vehicle (CV) finance, gold-backed lending and consumption loans, respectively, have better competitive positioning than their segmental peers.

“In comparison, firms like IIFL, Sammaan Capital, Manappuram Finance and Piramal Enterprises have moderate competitive advantages and may operate as price takers in their segments. Therefore, these entities may have lower margins and profitability than segment leaders or take on riskier exposure for higher yields,” per the report.

Corporate-owned lenders, such as Tata Capital Ltd (TCL), L&T Finance (LTF) and Aditya Birla Finance Ltd (ABFL) tap group benefits, such as brand and network sharing and healthy funding access, to gain strategic advantages regardless of product leadership.

Differentiated Segment Exposures

Fitch Ratings noted that individual segment exposures can significantly influence NBFIs’ growth, asset quality cycles, profitability, and funding and liquidity profiles.

“Muthoot’s exposure to high yielding, collateral backed gold loans (86 per cent of total loans) supports its above-peer profitability and low credit costs. Similarly, Shriram’s exposure to used CVs (67 per cent of total loans) leads to structurally higher non-performing loans (NPLs) due to its semi-rural borrowers, but asset quality cyclicality is moderated by its borrowers’ ability to ply shorter truck routes during periods of economic softness. Credit costs are also tempered by the underlying collateral,” the agency said.

Housing finance companies face net interest margin (NIM) pressure due to price-led competition for better-quality borrowers from banks. Fitch Ratings assessed that PNB Housing Finance and LIC Housing Finance‘s profitability has lagged due to compressed margins, despite stable credit costs.

The agency noted that LTF and Manappuram, which had 29 per cent and 24 per cent, respectively, of their total loans in unsecured microfinance at the end of the first half of the financial year ended March 2025 (1HFYE25), are reducing unsecured lending to decrease the riskiness and volatility of their business models, which should improve their risk profiles.

Even so, Manappuram’s core exposure to gold-backed loans (53 per cent at 1HFYE25) moderates its overall credit costs and supports its profitability relative to primarily microfinance or unsecured lenders such as CAG (CreditAccess Grameen) and Poonawalla Fincorp. Meanwhile, Bajaj Finance manages credit risk through its data-driven risk controls, despite a higher share of unsecured loans (35 per cent).

Fitch Ratings observed that diversified lenders such as TCL manage credit cycles by balancing exposure across multiple retail or corporate loan segments, although TCL does not have product leadership in any of its operating segments.

IIFL’s diversified exposure - across gold loans, housing loans, SME business loans and microfinance – helped the company maintain business volume and profitability during a regulatory ban on its gold-backed lending in 2024.

The agency said ABFL faces high risk from its exposure to real estate, corporate loans and unsecured personal loans. However, the lower risk mortgage loans within its group company, Aditya Birla Housing Finance, mitigates these risks for the lending group.

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Published on June 19, 2025