Infomerics Ratings has come out with an outlook report titled “NBFC Sector: Growth Outlook and Challenges” authored by the company’s chief economist Dr. Manoranjan Sharma. The report provides an insightful view of several aspects of NBFC’s landscape in India, its growth outlook, credit status, regulatory initiatives, exposure and challenges. Highlights:
Market Share: Over the past decade, NBFCs have significantly increased their share in the credit portfolio, growing from one-sixth of the total bank credit in 2013 to more than one-fourth now.
Risks: Leveraging technology, NBFCs have expedited and streamlined their credit delivery processes, positioning themselves as a preferred option for multiple individuals, groups and companies. However, this rapid expansion has also introduced systemic risks, prompting increased engagement and oversight from RBI.
Capital: The capital position of NBFCs stands healthy. CRAR stood at 26.6% in March 2024, well above the regulatory minimum requirement. RoA has been rising, the cost-to-income ratio has maintained a declining trend in the post-pandemic period and the NIM stood strong during 2023-24.
Future Growth: The robust economic growth, which the RBI Governor predicts will push India’s growth rate to 7.2% in the current financial year, is expected to fuel strong credit demand and support the NBFC sector’s profitability. This growth, coupled with current regulatory measures, will help mitigate the risk of rising credit costs on profitability.
NPAs: As of the end of March 2024, the gross non-performing assets (GNPAs) of both scheduled commercial banks (SCBs) and NBFCs were below 3% of total advances. Provisional data shows that the GNPA ratio for NBFCs stood at 2.5% at the end of March 2024. The GNPA ratio of NBFCs continued its downward trajectory in the post-pandemic period to reach 4% in March 2024. Within the retail segment, vehicle/auto loans had the highest GNPA ratio (5%), while other categories of loans had a ratio of below 3%
Bank Funding: The outstanding bank credit to NBFCs stood at Rs15.54 trillion in April 2024. Bank funding to NBFCs grew by 14.6% yoy in April 2024, compared to 29.2% in April 2023.
Sectors: In the financial year 2023, the industrial sector was the largest recipient of credit from the NBFC sector, followed by the retail and services sectors. Among the subcategories, large-scale industries received the highest amount of credit
Credit Intensity: NBFCs have shown significant credit growth, with their credit intensity (credit to GDP ratio) rising steadily. The spreads on bonds issued by NBFCs have remained below pre- pandemic levels, reflecting improved market confidence and increased activity in the sector.
Recommendations: To thrive in the evolving financial landscape, NBFCs must address the credit needs of underserved segments, leverage new sources of funds, and embrace technological advancements. Promoting financial literacy will be crucial in protecting consumers and promoting informed financial decisions.
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