High cost of funds, increased competitive pressures from banks, slowing growth and asset quality challenges would lower profitability for NBFCs which is expected to decline by 25-45 bps (one basis point is 0.01 percent) vis-à-vis FY2024 levels according to ratings firm Icra
Slowing direct bank credit will push the NBFCs towards capital market instruments. However, banks are one of the largest participants and are by far the largest subscribers of the securitisation and loan sell-downs by the NBFCs.
Deposit challenges faced with banks along with regulatory restrictions on lending to NBFCs will require NBFCs to diversify resource base. Shoring up alternative sources of funding, including securitisation, market issuance, external commercial borrowings are seen as other alternate sources of funding. As a result, weighted average cost of funds is projected to increase by 20-40 bps over the FY2024 levels.
“The banking sector, a key lender to the NBFC segment, is expected to register an overall credit expansion of around 12% in FY2025, resulting in an incremental bank credit of about Rs. 19.0-20.5 trillion” said A M Karthik, senior vice president & co-group head financial Sector Ratings, Icra . “This, however, is lower than the Rs. 22 trillion credit expansion in the last fiscal. Further, the impact of tightening regulatory norms for bank funding to the sector, is already visible over the last few months. Incremental direct bank credit to the NBFCs in Q1FY’2025 was a modest Rs. 75 billion compared to Rs. 920 billion in Q1 FY2024,”
Slower growth, steep credit expansion in the retail asset segments in the last two fiscals, would start being visible in the asset quality performance in FY’2025, Icra said. Moreover, concerns on over leveraging and increased share of unsecured loans exist. The resultant credit risk is likely to pose an higher loan quality risk for the sector.
Icra expects the overall retail asset loan quality (gross ) of the NBFCs, excluding housing finance companies (NBFC-HFCs), to weaken by 30-50 bps in the current fiscal.
