Medium and small NBFCs, defined as those with AUM of up to Rs 10,000 crore, are expected to grow at a CAGR of 25-30 per cent over FY24 and FY25, according to ICRA.

The growth will be led by a lower base and larger share of high-growth segments such as affordable housing, microfinance, secured business loans, used vehicle loans and unsecured loans (personal, consumption loans and unsecured business loans), it said, based on an assessment of 105 medium and small NBFCs.

These NBFCs accounted for 14 per cent of the industry AUM as of March 2023, and grew at a CAGR of 25 per cent between March 2019 and March 2023, higher than the industry growth rate of 9 per cent. 

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“High growth in the past and the expected AUM expansion going forward will keep the portfolio seasoning at low levels, especially for long-tail loans, namely affordable housing and secured business loans,” said A.M. Karthik, Senior Vice-President and Co-Group Head, Financial Sector Ratings, ICRA.

Portfolio quality

The gross stage-3 assets ratio for these NBFCs fell to 2.6 per cent from 4.2 per cent a year ago, lower than the levels reported by larger players, driven by write-offs and faster AUM growth. However, these are expected to increase by up to 60 bps from March 2023 levels as the portfolio seasons over the next two years.  

“NBFCs have lowered their loan provisions over the last fiscal, as the business environment has improved post the pandemic; provisions carried by entities in the unsecured loan space as of March 2023 were lower than the write-offs witnessed in the last fiscal. In view of the high growth expectation in this segment and, lower seasoning in the long-tail secured book, there is scope for improving the same going forward,” Karthik said.

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Of these NBFCs, digital lenders reported higher loan losses, with loan write-off at about 9-10 per cent in the last two fiscals. These entities, however, have a lower loan tenor, ranging from 1-12 months, thus write-offs, in relation to their average disbursements in the last two fiscals stood at 3.5-5.5 per cent.

Capital raising

Middle and small NBFCs have raised fresh equity capital worth 15-20 per cent of their opening net worth positions in the last two financial years. They would further require sizeable debt funding of about Rs 2.0-2.2 lakh crore over FY24 and FY25 to manage their growth expectations.

Loans from banks and financial institutions and securitisation are the key fund-raising avenues, accounting for close to 75 per cent of these NBFCs’ borrowings. Expansion in bank credit will continue to be key for incremental credit flows to NBFCs to ensure sectoral credit concentration is under check.

“Entities in the unsecured loan segments would be required to raise capital in the next 12-18 months to keep their leverage under control,” ICRA said.

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