Large Indian NBFIs poised to outperform economic and regulatory challenges: Fitch Ratings

New Delhi [India]January 24 (ANI): India’s large non-bank financial institutions (NBFIs) are better positioned to weather economic and regulatory challenges than their smaller peers, according to Fitch Ratings.

Although higher economic conditions, bank financing and asset quality issues are expected to impact the sector’s credit growth and profitability in the short term, larger NBFIs with strong operations and diversified funding channels are expected to maintain stable performance.

Loan growth in the NBFI segment has declined from 18% in the financial year ending March 2024 (FY24). Credit growth for NBFIS, excluding housing finance companies, fell to 6.6% between March and September 2024.

This slowdown is partly due to weaker economic growth. Fitch revised its FY25 GDP growth forecast to 6.4% in December 2024, down from 7.0%, although the outlook for FY26 remains stable at 6.5%.

Tighter regulations have also impacted the industry, raising capital costs and increasing compliance requirements. Measures proposed over the past 18 months include a higher risk weight for bank loans to NBFIs and unsecured loans, as well as tighter regulations on gold-backed loans and microfinance.

Mid-sized and smaller NBFIs may face greater difficulties due to concentrated investment portfolios and limited access to capital. Regulatory enforcement, such as restrictions on new business activities, may further limit its growth.

Additionally, rising violations in unsecured lending areas such as microfinance and personal loans have prompted lenders to tighten underwriting standards.

Microfinance disbursement fell by 10% year-on-year in Q2 FY25 and the crime rate in the sector increased to 3.8% in September 2024 from 3.0% in June 2024. Adapt to these challenges.

A larger NBFI allows for better navigation of the current environment. They are expected to maintain mid- to high-grade credit growth over the next few years, supported by their established operations and access to a variety of funding sources, including portfolio securitizations and offshore lending.

Segments such as business loans for property and new commercial vehicle loans are likely to experience higher demand, but strong collateral coverage and improved recovery processes should help maintain asset quality. Gold and home loans are likely to remain resilient to economic headwinds.

Funding costs are unlikely to ease significantly, and bank lending rates remain high. Bank lending to NBFIS fell to 8.5% year-on-year by November 2024, compared with 21% in the same period last year. However, local mutual funds increased their subscription to NBFI debt, rising by 51% in November 2024.

While larger NBFIs continue to expand their funding sources, smaller players are expected to face challenges in sustaining growth and profitability in the current environment.

The near-term outlook for the Indian NBFI sector remains mixed. While larger players are expected to show resilience, smaller and mid-sized NBFIs may face obstacles due to regulatory changes, funding challenges and economic headwinds. However, the sector’s long-term prospects remain linked to wider economic stability and regulatory developments. (ANI)