Ind-Ra-Mumbai-7January 2025 India Ratings and Research (Ind-Ra) has maintained a neutral sector outlook and a Stable rating Outlook for non-bank finance companies (NBFCs) for FY26. The agency opines that after witnessing a phase high reliance on the unsecured loan segment for achieving loan growth and to protect profitability, along with increased regulatory oversight, NBFCs are calibrating their business expansion plans to optimise the risk-adjusted profitability over the medium term. Consequently, Ind-Ra believes loan growth would further decline in FY26 to 18.5% yoy (FY25: Ind-Ra’s estimated down 20% yoy), and a more pronounced decline would be in the unsecured lending segment which includes personal, business and microfinance loans.
Ind-Ra opines the measures taken by the regulator on customer centricity for bringing clarity around product features, pricing and increasing transparency in customer verification process would be beneficial for the long-term sustainable expansion of the sector. However, lenders which are getting the regulatory alignment would face moderating growth in the near term. Asset quality issues cropping up especially in the unsecured lending segments could further hinder the loan book growth in FY26, given the reliance on unsecured loans for growth was high during FY23-1HFY25.
Ind-Ra expects net interest margins to remain under pressure for most part of FY26, given the expectation of a gradual softening in the system interest rates as well as limited scope to increase the pricing of assets across segments due to stiff competition, along with the asset mix tilting in favour of secured assets. Co-lending as a channel for growth could gain further traction in FY26, given that on-balance sheet funding would be constrained. NBFCs could look to grow their assets under management in a capital-light manner, amid a rise in leverage levels for the sector. However, the overall leverage for the sector would still be in a comfortable range.
Profitability pressure could intensify due to the ongoing rise in the credit cost for the sector because of borrower overleveraging and slowdown in credit growth (i.e. base effect playing out after a high growth phase). Ind-Ra believes the unsecured personal and business loans segment could exhibit some more pain in asset quality, as NBFCs curtail lending these loans. Furthermore, the loss given defaults are high in these collateral-free loans. Ind-Ra opines even secured business loans (backed by property) could show some volatile repayment behaviour, however loss given default could be lower.
Ind-Ra expects the present scenario to lead to consolidation in the sector, with weak entities being acquired by strong ones.