Singapore/Mumbai, January 23, 2025: Fitch Ratings has issued a report indicating that India’s current economic landscape, characterized by softer growth, tighter bank funding, and asset quality concerns, is poised to impact credit growth and earnings among non-bank financial institutions (NBFIs) in the near term. The report highlights that while mid-sized and smaller NBFIs may encounter significant hurdles, larger lenders are expected to maintain more stable performance due to their robust lending operations and enhanced access to funding.
After reaching a peak of 18% in loan growth in the financial year ending March 2024 (FY24), sector growth is showing signs of moderation. Credit growth for NBFIs, excluding housing finance companies, has slowed to 6.6% between March and September 2024. This deceleration is partly attributed to the country’s softer economic conditions, resulting in Fitch’s downward revision of its FY25 GDP growth forecast to 6.4% from a previous 7.0%. However, the agency does not anticipate a prolonged economic downturn, maintaining its FY26 GDP growth estimate at 6.5%.
The report further outlines that regulatory tightening has contributed to elevated capital costs for banks, imposing additional compliance burdens on NBFIs and exacerbating the slowdown in credit growth. Stricter regulations, which include increased risk-weights on bank lending to NBFIs and personal unsecured loans, as well as tightened guidelines on gold-backed lending and microfinance, reflect the changing landscape. Stringent enforcement actions have also led to new restrictions on business operations, restraining lending activities.
Larger NBFIs are expected to sustain mid- to high-teen credit growth over the next few years, despite challenges facing cyclical lending segments such as business loans against property and new commercial vehicle loans. The agency notes, however, that asset quality remains relatively stable due to robust collateral coverage and improved credit recovery processes established in recent years.
Fitch Ratings warns that lenders are likely to adopt a cautious approach toward unsecured loans, including microfinance and personal loans, in response to rising delinquency rates in these segments. Microfinance disbursements fell by 10% year-on-year in the second quarter of FY25 as lenders tightened underwriting standards. This downturn follows an increase in the sector’s 90-days past-due ratio, which rose from 3.0% in June 2024 to 3.8% in September 2024. Asset quality pressures are expected to persist as lenders seek to reduce exposure to over-leveraged borrowers.
The report assesses individual NBFIs, noting that Manappuram Finance Limited (BB-/Stable) faces risks due to its microfinance exposure, which constitutes 24% of total loans. However, the company’s substantial and less risky gold loan portfolio is expected to mitigate these risks. Conversely, IIFL Finance Limited (B+/Stable) appears more vulnerable, with microfinance, business loans, and digital loans making up 45% of its total on-book loans as of September 2024.
Fitch Ratings does not foresee a significant reduction in funding costs, indicating that bank lending rates are likely to remain elevated. The pace of bank funding to NBFIs has also slowed, rising by 8.5% year-on-year by November 2024, down from 21% the previous year. Although local mutual funds have increased subscriptions to NBFI debt, capital market funding generally remains more accessible to larger NBFIs.
In conclusion, while larger NBFIs are expected to diversify their funding sources, primarily through portfolio securitization and offshore borrowing, smaller and mid-sized institutions with concentrated lending portfolios may grapple with significant challenges that could impact their growth, asset quality, and profitability in the months ahead.