NBFC advances to personal loans, MFIs to reduce says CRISIL Ratings 

Unsecured loans given by Non Banking Finance Companies (NBFCs) and credit to microfinance segments, accounting for 23% of the overall NBFC Asset Under Management (AUM) are expected to be impacted the most in the current and next fiscals according to CRISIL Ratings’ outlook on the sector. 
 
Krishnan Sitaraman, Chief Ratings Officer, CRISIL Ratings said, “Recent regulatory pronouncements have brought to the fore the criticality of compliance — both in letter and spirit — and operational risk management.”

“Additionally, asset quality metrics are weakening in the past few quarters in some segments. This has necessitated a recalibration of growth strategies, especially in unsecured loans and microfinance,” he said. 
 
Unsecured lending reported rapid growth in the past three fiscals at a CAGR of 45% and has become the third-largest component of the overall NBFC AUM. 
But that pace is seen moderating to 15-16% in this and next fiscals. 

The microfinance segment is facing asset quality headwinds, so its growth is expected to be muted this fiscal, with a cautious recovery pencilled in for next fiscal. That compares with 25% growth last fiscal, the rating agency said.
As per the outlook of CRISIL Ratings the growth in AUM of NBFCs is expected to moderate to 15-17% in the current and next fiscals, a 600-800 basis points (bps) decline from a strong 23% growth seen last fiscal, as they navigate the dynamics of the evolving operating and regulatory environments and recalibrate strategies, 
 While the expected growth will still be above the decadal average of 14% (fiscal 2014-2024), it will moderate from that seen in fiscal 2024 on account of three factors.
Firstly, rising concerns around household indebtedness and asset quality risks will have a bearing on growth strategies in specific retail asset segments such as microfinance and unsecured loans.
Second, regulatory compliance requirements have intensified with focus sharpening on customer protection, pricing disclosures and operational compliance which will necessitate process recalibration. 
And third, the access to diversified funding sources, a crucial determinant of growth, especially given the slowdown in bank lending to NBFCs, will differ across NBFCs, it said.
 AUM growth of NBFCs in the two largest traditional segments — home and vehicle loans (45% of NBFC AUM) — will continue to be driven by fundamentals with limited impact of the above factors.
 “Home loans are expected to maintain steady CAGR3 of 13-14%. Policy initiatives, such as the re-introduction of the Interest Subsidy Scheme, will provide impetus. Housing finance companies (HFCs) focused on the affordable segment ( ₹25 lakh loan ticket size) are likely to grow faster at CAGR of 22-23%,” it said.
“Growth in vehicle finance is estimated to moderate but remain healthy at CAGR of 15-16%. While unit sales growth of new vehicles will be lower, the shift to higher-value vehicles and continued focus on used assets should provide an offset and support overall AUM growth,” it added. 
 
This sector which had been heavily dependent on banks to access funding has diversified the sources even though bank lending to NBFCs has remained in the range of ₹13-13.5 lakh crore since November 2023 when regulatory risk weights were raised.
 
Ajit Velonie, Senior Director, CRISIL Ratings said, “Our study shows most of the large NBFCs, especially the parent-backed ones, have tapped alternative funding sources such as capital market instruments, foreign currency borrowings and securitisation over the last three quarters.”

“For the rest, the ability to continue tapping such sources at an optimal cost remains crucial to growth,” he added.