Loan growth of NBFCs to be in 15-16% range in FY24: India Ratings

Loan growth of non-bank finance companies (NBFCs) would be in the range of 15-16 per cent year-on-year (y-o-y) in FY24, coming on a higher base, while that of housing finance companies (HFCs) would be in the range of 13-14 per cent, even as both these entities will face margin pressure due to stiff competition from banks,  according to India Ratings and Research (Ind-Ra).

The credit rating agency noted that large NBFCs have managed to move out from their niche or dual-product segments and ventured into well-diversified product lines across both secured and unsecured loan categories, to drive cross-sell opportunities across borrowers and augment their differentiated sourcing strategy through existing channels and new partnerships.

Ind-Ra believes some of the large NBFCs may raise capital in 2H (October-March) FY24, as capital consumption has been higher due to the strong loan growth seen in FY23.

Also, some NBFCs are building significant capital base to manage competition by widening their customer base through either acquisitions or entering into new product segments, while also investing in an expansion of their network.

• Also read: Mudra loans surge at record 38% in H1 to ₹1.92-lakh crore

Margin compression

The agency underscored that NBFCs are facing stiff competition in secured lending space from banks and small finance banks, which could incrementally restrict the complete pass through of increases in borrowing cost in 2HFY24, driving margin compression by 20-25 basis points (bps) y-o-y in FY24.

This has also led to NBFCs venturing out on the unsecured lending side to protect margin where growth has been elevated through partnerships with fintechs, it added.

However, NBFCs providing both asset (co-lending) and liability support to fintechs need to calibrate their approach as the end-use of these loans largely remains consumption-based where the borrowers overleveraging could be a large risk.

Also, all lenders providing balance sheet to few large originators could pose a cascading risk if the funding environment for fintechs turns tighter on asset quality concerns.

Ind-Ra said NBFCs could look to partially offset the margin pressure by opportunistically increasing their short-term borrowings through commercial papers, largely in accordance with the proportion of short-term assets in the balance sheet, thereby managing asset-liability tenors.

Also, diversified, large NBFCs could shift towards public debentures to enhance granularity in the overall funding mix, in view of the muted demand for long-duration bonds from mutual funds.

• Also read: Banks’ non-food credit growth decelerates to 15% y-o-y in August 2023: RBI

Stage 3 assets

While credit costs in FY24 are likely to largely remain at levels seen in FY23, stage 3 assets (where there is a payment overdue for more than 90 days) could marginally rise to around 3.8 per cent at FYE24 (FY23: 3.5 per cent).

Ind-Ra believes NBFCs will have to judiciously manage margins in FY24, given the elevated borrowing cost and limited flexibility in passing over rate hikes in the secured lending segments due to the competition from banks and factoring in borrowers’ repayment ability.

HFCs

Ind-Ra assessed that housing finance companies (HFCs) would continue to witness loan growth in FY24, as increasing home ownership and upscaling would drive demand across mid-ticket segment across metros and tier-1 cities.

However, the agency believes headwinds are increasing with rising interest rates, inflationary pressure on savings, and rising property prices due to higher construction costs, impacting borrowers’ overall affordability.

The agency opined that loan growth could vary across large ticket and affordable housing players in FY24.

While loan growth for affordable housing players would be around 16 per cent in FY24, the overall sector growth would in range of 13-14 per cent in FY24.

The margins for the sector could come under pressure as their liabilities continue to get repriced in 2HFY24 and banks continue to compete intensively for customers.

HFCs would focus and grow their non-housing finance segment where construction finance and loan against property have seen steady growth largely, to balance margin pressures in the pure housing segment.

Ind-Ra believes the sector could witness a marginal rise in the gross stage 3 assets to 3.17 per cent in FY24 (FY23: 3.1 per cent), largely due to inflationary pressures impacting borrower cashflows and the recent slowdown in wage growth.

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