India’s softer economic conditions, tighter bank funding and pockets of asset quality weakness are likely to weigh on credit growth and earnings for some non-bank financial institutions (NBFIs) in the near term, according to Fitch Ratings.
The rating agency opined that this might impede the performance of mid-sized and smaller NBFIs, but larger lenders should deliver steadier performance due to their more established lending operations and better funding access.
Fitch noted that the sector’s loan growth has begun to wane from its 18 per cent high in the financial year ending March 2024 (FY24).
Credit by NBFIs, excluding housing finance companies, moderated to 6.6 per cent from March 2024 to September 2024, partly due to softening economic growth, per the agency’s assessment. The agency had trimmed its FY25 GDP growth forecast to 6.4 per cent in December 2024 from a previous projection of 7 per cent.
Nonetheless, Fitch Ratings does not expect an extended economic slowdown and its 6.5 per cent GDP growth projection for FY26 remains unchanged.
Regulatory tightening
The agency observed that the regulatory tightening has also raised the cost of capital from banks and added to NBFIs’ compliance requirements, contributing to the slowdown in credit growth.
Pronouncements over the past 18 months include higher risk weights on bank lending to NBFIs and personal unsecured loans, as well as tightened guidelines on gold-backed lending and microfinance. The agency said stringent enforcement actions, such as new business stoppages, may also restrain lending growth.
Fitch Ratings emphasised that large lenders with better reach should sustain mid- to high-teen credit growth over the next couple of years.
“Secured, but cyclical, lending segments, such as business loans against property and new commercial vehicle loans, could face softer credit demand. Even so, asset quality should be supported by collateral coverage and strengthened credit recovery processes implemented over the past few years,” Siddharth Goel, Director, Non-Bank Financial Institutions, Fitch Ratings, said.
The agency expects lenders to remain cautious towards unsecured loan products, including microfinance and personal loans, amid rising segment delinquencies.
Fitch Ratings noted that microfinance disbursements contracted by 10 per cent year over year in 2QFY25 as lenders tightened underwriting. This was after the sector’s 90-day past-due ratio climbed to 3.8% in September 2024 from around 3.0% in June 2024. Asset quality pressure is likely to persist for the next few quarters as lenders wean off over-leveraged borrowers.
“We believe risks to Manappuram Finance Limited (BB-/Stable) from its microfinance exposure, which stands at 24% of total loans, should be mitigated by the lender’s large and less-risky gold loan portfolio.
“However, the asset quality of IIFL Finance Limited (B+/Stable) is more vulnerable, due to its microfinance, business loan and digital loan exposure, which collectively accounted for 45% of its total on-book loans at end-September 2024. Meanwhile, we expect used commercial vehicles, gold and housing loans to be less sensitive to the recent dip in economic activity,” Fitch said in its non-rating action commentary.
Bank lending rates to remain high.
The agency does not expect a major easing in funding costs, with bank lending rates likely to remain high. Bank funding to NBFIs should also expand at a more measured pace amid the increased regulatory risk weights and slowing bank deposit growth.
Bank lending to NBFIs slowed to 8.5% yoy by November 2024, from 21% yoy as of November 2023. Local mutual funds have picked up the slack, with subscriptions to NBFI debt surging by 51% yoy in November 2024. That said, capital market funding is typically more accessible for larger NBFIs, opined the agency.
“We expect larger NBFIs to continue to broaden their funding sources, primarily through portfolio securitisation and offshore borrowing. Meanwhile, small and mid-sized NBFIs – with more concentrated lending and funding portfolios – may face greater challenges in their growth, asset quality and profitability,” said Goel.
