Non-bank lenders are now focusing on reviving growth as the sector’s asset quality has improved, supported by retail demand and ample liquidity, according to ICRA Ltd.
India’s non-banking financial services industry’s assets are likely to reach Rs 44 lakh crore by March 2023, the credit rating agency said. And that’s expected to rise to Rs 49 lakh crore by March 2024.
Supported by low credit costs, the net profit margins of NBFCs are expected to rise from 2.0-2.4% in FY22 to 2.6-2.9% in FY23, according to ICRA. Similarly, the average margins for housing finance companies, or HFC, are expected to improve from 1.6% to 2.0-2.2%.
“The sector has shifted gears from preserving asset quality to now focusing on targeting growth,” R Srinivasan, sector head of financial services ratings at ICRA, said in a Dec. 15 webinar. Overall, retail loans are likely to be the fastest-growing segment for NBFCs, ICRA said.
The unsecured segment—comprising both retail loans and microfinance—constitutes about 25% of the assets under management of retail NBFCs. These segments are expected to see year-on-year growth of 20-25%, Srinivasan said.
Even though the Reserve Bank of India has tightened monetary policy, the pass-on in borrowing rates offered by NBFCs has not been very significant, according to Srinivasan. The full impact of the rate hikes is likely to be more pronounced in the second half of FY23.
Non-bank lenders have so far managed to shelter themselves from the rising costs by increasing their borrowing from banks, he said. Banks, buoyed by the liquidity, did not raise the lending rate for NBFCs in line with the RBI’s rate actions.
“NBFCs have been able to arbitrage on this opportunity to reduce the cost of funding or limit the increase,” he said.
ICRA also expects that non-performing assets of non-bank lenders to reduce by 40 basis points year-on-year to 3.8% by March 2023.
NBFCs are also well capitalised to absorb any shocks that come as interest rates harden in the second half, said Karthik Srinivasan, group head of financial sector ratings at ICRA.