MUMBAI: Regulatory tightening and evolving asset quality trends are expected to slow the non-banking financial companies (NBFCs) growth in India, with their assets under management (AUM) projected to grow at a reduced pace of 15-17 per cent in FY25 and FY26.
This marks a significant moderation from the robust 23 per cent growth recorded in FY24, according to a report by Crisil.
While this slower NBFCs growth reflects recalibrated strategies in response to a stricter regulatory environment, it is still expected to outpace the sector’s average AUM growth rate of 14 per cent over the last decade. The shift signals a move toward more sustainable growth as NBFCs navigate an increasingly complex operational landscape.
Regulatory tightening
In November 2023, the Reserve Bank of India (RBI) raised risk weights on banks’ lending to NBFCs, particularly targeting unsecured loans – a segment where NBFCs are heavily active. This regulatory measure, aimed at mitigating systemic risks and safeguarding customer interests, has compelled NBFCs to recalibrate their growth strategies.
“The regulatory environment is becoming more stringent, with intensified compliance requirements focusing on customer protection, pricing transparency, and operational discipline,” said Krishnan Sitharaman, Chief Rating Officer at Crisil.
“These changes are reshaping how NBFCs operate, ensuring the NBFCs growth is balanced and risks are minimized.”
The microfinance sector, a key area for NBFCs, has recently exhibited signs of asset quality stress, further underscoring the need for recalibration. Sitharaman noted that while delinquency levels in the overall NBFC sector remain stable, rising household indebtedness and asset quality concerns in microfinance and unsecured lending are causing caution.
Shift in lending dynamics
The rating agency highlighted that unsecured loans and microfinance – segments that account for 23 per cent of NBFC AUM – are likely to witness the sharpest slowdown in growth.
Unsecured lending, which experienced a compound annual growth rate of 45 per cent over the last three years, is expected to expand at a significantly reduced rate of 15-16 per cent in FY25 and FY26. Similarly, growth in microfinance AUM will remain muted, according to the rating agency.
Despite the broader slowdown, the home loan and vehicle loan segments, which constitute 45 per cent of the sector’s AUM, are expected to remain resilient. Their growth is underpinned by strong demand fundamentals and a relatively stable risk profile.
Challenges in funding
Funding challenges also loom large for NBFCs growth, particularly as bank lending to the sector has plateaued. Since November 2023, bank lending to NBFCs has remained in the range of Rs13-13.5 lakh crore.
“Only larger NBFCs with strong parentage have been able to diversify funding sources by tapping into commercial paper and bond markets,” said Ajit Velonie, Senior Director at Crisil.
To address funding constraints, securitisation is emerging as a critical tool for NBFCs. Velonie noted that securitisation volumes are expected to reach record levels this fiscal year, as entities seek alternative funding mechanisms.
Economic growth
The slowdown in NBFCs growth comes against the backdrop of weaker GDP expansion, which slowed to a seven-quarter low of 5.4 per cent in Q2 FY25. Sitharaman pointed out that NBFC lending growth and GDP growth are closely correlated, and the moderation in AUM growth reflects broader economic trends.
“While asset growth in NBFCs is expected to decelerate, this shift is in line with the need for sustainable practices that balance growth with regulatory compliance,” Sitharaman added.
Compliance and sustainability
The evolving regulatory landscape emphasises compliance in letter and spirit, particularly in areas such as customer protection and transparency. Crisil observed that recent lapses in compliance have underscored the need for adopting a more disciplined approach towards NBFCs growth.
Subodh Rai, Managing Director at Crisil, highlighted that the current environment presents an opportunity for NBFCs to strengthen governance frameworks and prioritise long-term sustainability. “This recalibration is essential to address vulnerabilities in segments like unsecured lending and microfinance,” Rai said.
Outlook
While the trajectory for NBFCs growth is set to moderate, the sector remains poised for evolution, with opportunities for innovation in funding and lending practices. Crisil’s report underscores the importance of aligning growth strategies with regulatory expectations to ensure the sector’s resilience and sustainability in the years ahead.
