The growth outlook for NBFCs and HFCs (housing finance companies) has improved to 13-15 per cent from 11-13 per cent earlier led by an upward revision in the projection of retail loan growth, ICRA Ratings said on Thursday.

Total sector AUM stood, consisting of retail, infrastructure and wholesale loans, stood at about ₹40-lakh crore at the end of March.

Retail loan portfolios of NBFCs are seen growing 18-20 per cent in FY24 against 12-14 per cent earlier, the rating agency said, attributing the revision to strong growth in unsecured loans – comprising personal and consumption loans, unsecured small enterprise loans and microfinance loans. NBFCs’ retail AUM was at ₹14-lakh crore as of March 2023.

“High growth in the NBFC-retail segment shall be driven by the expected expansion of 26-28 per cent for unsecured loans, which stood at about ₹5.1-lakh crore as of March 2023. Secured NBFC-retail AUM, consisting of vehicle finance, gold loans and secured business loans etc, together is expected to grow at a relatively sedate albeit healthy 14-16 per cent,” said AM Karthik, Vice-President & Co-Group Head, Financial Sector Ratings, ICRA.

HFCs’ retail AUM of ₹7-lakh crore as of March 2023, comprising home loans and loans against property, is expected to grow at 12-14 per cent, also higher the earlier estimate of 11-13 per cent.

On the other hand, the growth outlook for infrastructure and other wholesale loans remained unchanged at 10-12 per cent, ICRA said.

In FY23, NBFCs’ retail AUM grew 26 per cent led by 44 per cent increase in unsecured loans. Unsecured loans have grown at a CAGR of 27 per cent over the last five years whereas secured loans grew at 11 per cent.

“Unsecured loans would face higher credit losses even on a steady-state basis vis-à-vis most other secured lending segments; loan losses for this segment would be about 4-6 per cent, on a cohort basis,” Karthik said.

Incremental funding

To support growth, NBFCs and HFCs are estimated to require incremental funding of ₹4.7-5.0 lakh crore in FY24, over and above the refinancing of existing/maturing debt, ICRA said, adding that the weighted average cost of funds likely to go up by 60-80 bps for the year driven by continued repricing of lending rates.

Return on managed assets (RoMA) for NBFCs is seen moderating slightly to 2.6-2.8 per cent in FY24 from 2.8 per cent in FY23, whereas for HFCs is seen rising to 1.7-1.9 per cent against 1.7 per cent in FY23 due to their sizeable share of floating rate loans.