India’s NBFIs: Resilience Amid Economic Challenges
India’s non-bank financial institutions (NBFIs) play a crucial role in the country’s financial landscape. They provide essential services, including loans and investment opportunities, to various sectors. Recently, Fitch Ratings released a report highlighting the differing positions of large and small NBFIs in the face of economic and regulatory challenges. The report indicates that larger NBFIs are better equipped to navigate these hurdles compared to their smaller counterparts. This article delves into the current state of India’s NBFI sector, examining the factors influencing credit growth, regulatory impacts, and the outlook for the future.
Economic Conditions and Credit Growth
The NBFI sector in India has experienced a notable slowdown in credit growth. After reaching a peak of 18% in the fiscal year ending March 2024, growth has moderated significantly. As of September 2024, credit growth for NBFIs, excluding housing finance companies, stood at just 6.6%. This decline is largely attributed to weaker economic conditions. Fitch Ratings has revised its GDP growth forecast for FY25 to 6.4%, down from 7.0%. However, the outlook for FY26 remains stable at 6.5%.
The economic landscape is challenging for many NBFIs. Tighter bank funding and concerns about asset quality are affecting profitability and credit growth. Larger NBFIs, with their robust operations and diversified funding channels, are expected to maintain steadier performance. In contrast, smaller and mid-sized NBFIs may struggle due to concentrated portfolios and limited access to funding. As a result, the overall credit growth in the sector is expected to remain subdued in the near term.
Regulatory Challenges and Compliance Costs
Regulatory changes have significantly impacted the NBFI sector. Over the past 18 months, measures have been introduced that raise the cost of capital and increase compliance requirements. These include higher risk weights on bank lending to NBFIs and stricter rules on unsecured loans, gold-backed loans, and microfinance. Such regulations are designed to enhance the stability of the financial system but have also created challenges for NBFIs.
Mid-sized and smaller NBFIs are particularly vulnerable to these changes. They often have concentrated portfolios and limited resources, making it difficult to adapt to new regulations. Additionally, rising delinquencies in unsecured lending segments, such as microfinance and personal loans, have led lenders to tighten their underwriting standards. For instance, microfinance disbursements fell by 10% year-on-year in the second quarter of FY25, with the delinquency ratio increasing from 3.0% to 3.8% within three months. These trends indicate that smaller NBFIs may face significant hurdles in sustaining growth and profitability.
Future Outlook for NBFIs
Despite the challenges, the outlook for larger NBFIs remains relatively positive. They are expected to sustain mid-to-high-teen credit growth in the coming years, supported by their established operations and access to diverse funding sources. These sources include portfolio securitization and offshore borrowing, which provide greater financial flexibility. While segments like business loans against property and new commercial vehicle loans may see softer demand, robust collateral coverage and improved recovery processes should help maintain asset quality.
On the other hand, smaller NBFIs are likely to remain cautious as they navigate the current environment. The cost of funding is expected to remain high, with bank lending rates not easing significantly. By November 2024, bank lending to NBFIs slowed to 8.5% year-on-year, a stark contrast to the 21% growth seen a year earlier. However, local mutual funds have increased their subscriptions to NBFI debt, rising by 51% year-on-year in November 2024. This shift indicates a potential avenue for larger NBFIs to expand their funding sources while smaller players may continue to face challenges.
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