The assets under management (AUM) of non-banking financial companies (NBFC) are back in focus since fiscal 2023, after having weathered multiple challenges exacerbated by the pandemic.

From around 15 per cent growth in fiscal 2023, AUM growth accelerated to 18 per cent in fiscal 2024, and shows no sign of slowing down.

Strong credit demand across retail segments, resilient economic activity, strong balance sheets due to higher liquidity, capital and provisioning buffers, and improved asset quality are seen driving AUM growth to 15-17 per cent in fiscal 2025. 

Overall, growth continues to be driven by large NBFCs. Between fiscals 2019 and 2023, the share of the top 10 NBFCs had risen around 1,000 basis points (bps) to 57 per cent. The top NBFCs have also diversified into more asset classes over the past five years.

Retail loans

AUM growth is expected to be broad-based across retail segments. Home loans are likely to grow about 15 per cent in fiscal 2025, supported by affordability, higher urbanisation, and mortgage penetration. The government’s capital expenditure outlay and focus on ‘housing for all’ through multiple schemes should help step up demand for housing as well as micro, small and medium enterprise (MSME) credit.

Vehicle finance saw strong growth in the past two years with a rebound in new asset sales and more focus on used vehicle financing. For fiscal 2025, with a likely moderation in sales, we expect growth to temper marginally but remain healthy at about 17 per cent, supported by higher ticket sizes. Used-vehicle financing will continue to outpace new vehicle financing, even for NBFCs. 

Unsecured loans (about 16 per cent of overall AUM as of December 2023) could see a recalibration within the growth strategy of NBFCs. This follows a change in regulations in November 2023 that saw the risk weights for unsecured consumer credit increase to 125 per cent from 100 per cent earlier. Overall, growth is likely to taper to 25-30 per cent in fiscal 2025 from about 35 per cent in fiscal 2024; signs of moderation have been visible since December 2023. 

As in the last five fiscals, the wholesale loan segment — largely real estate lending — will decline. However, we could see a selective re-entry of NBFCs, especially housing finance companies, into real estate lending, but contributing less to overall AUM than in the past. There could be stronger risk guardrails around factors such as stage of construction, geographies, and credit quality of developers, among others.

Asset quality

Delinquency metrics across asset classes have steadily improved. The gross Stage 2 loans halved to 3.7 per cent as on December 2023 from 7.4 per cent as on March 2022. However, asset quality of unsecured loans will bear watching given the higher growth, especially amid higher interest rates, inflation, and indebtedness of borrowers. Additionally, the recent private loan waiver campaigns, along with staff attrition challenges, could impact the asset quality of microfinance loans. 

The capital structure of NBFCs remains healthy, supported by internal accruals and equity raise in recent years. Debt-equity ratio has improved to around 4.9 times as of December 31, 2023, down from 5.3 times and 5.7 times as of March 2023 and March 2022, respectively, 

Bank funding to NBFCs has slowed to ₹13.01 lakh crore in February 2024 from ₹13.08 lakh crore in December 2023. Yet, on-year credit growth remains healthy.

Additionally, cost of borrowing for NBFCs has increased by 25-50 bps in the last quarter of fiscal 2024 and may rise more in the first half of this fiscal as banks recalibrate lending rates. Hence, funding diversification would be imperative for NBFCs. 

The higher cost of funds may compress net interest margin and temper profitability — return on managed assets — to about 20 bps in fiscal 2025. 

Finally, compliance and operational controls would remain key for NBFCs amid the evolving regulations. 

(The writer is Senior Director, CRISIL Ratings Ltd)