According to Crisil Ratings, unsecured retail loans are projected to expand at a slower rate of 20-30% compared to 45 percent as non-banking financial companies (NBFC) change their strategy in response to recent regulatory measures taken by the Reserve Bank of India. "Assets under management (AUM) of non-banking financial companies (NBFCs) are set to log a healthy 14-17 percent growth next fiscal year on the back of continued strong credit demand across retail loan segments," the report concluded.
Growth may be slightly lower than the 16-18% predicted in the current fiscal year, since unsecured retail loans, the fastest growing section of the NBFC AUM pie thus far, are forecast to rise at a slower pace. In the future, diversity of product offerings and funding profile will be critical components of their growth plan."
Previously, on November 16, 2023, the RBI increased the risk weights on riskier unsecured retail loans and credit cards issued by banks and non-bank finance firms (NBFCs) by 25 percentage points. Furthermore, risk weights on bank credit to NBFCs increased. This is due to the system's strong growth in consumer lending, as well as certain concerns raised about increasing delinquencies in smaller ticket sized loans. "This move by the RBI improves capital buffers and puts caution in action, that bodes well for the asset quality cycle in the medium term, and ensures credit growth is met with higher risk awareness and financial stability," said HDFC AMC, which is a subsidiary of HDFC.
"The recent regulatory measures are aimed at unsecured retail loans and have no bearing on secured asset classes, which are expected to grow steadily." "Most importantly, the regulatory changes have no effect on HFCs," stated Gurpreet Chhatwal, Managing Director at CRISIL Ratings.
According to a CareEdge analysis, from 2017 to 2023, personal loan credit grew at over 1.5 times the rate of overall credit growth in both banks and non-banking financial companies (NBFCs). Unsecured personal loans outperformed the overall increase of the personal loan book and account for roughly one-third of total personal loan segment loans. The trend, it continued, has been aided further by the introduction of Fintech and Digital platforms, which have contributed to increasing origination volumes. The emphasis placed by NBFCs on smaller ticket-size loans has been a primary driver of volume growth in the unsecured personal loan category. "High growth in unsecured personal loans is driven by a variety of factors, some of which are structural in nature, and thus a relatively higher growth rate is likely to continue in the future." However, the recent RBI notification targeted at discouraging excessive consumer credit growth is projected to have an immediate and short-term impact on growth momentum.Although asset quality has remained consistent, "vigilant monitoring is required, particularly on small ticket size loans," it stated.
According to CRISIL, the two main traditional areas, home loans and car finance, now account for 25-27 percent of NBFC AUM, and both are likely to grow steadily. Home loan growth of 12-14 percent next fiscal year will be driven by HFCs' focus on affordable home loans (ticket sizes less than Rs 25 lakh), while vehicle finance is expected to grow 18-19 percent this fiscal year and 17-18 percent next fiscal year on the back of solid underlying-asset sales.
"Unsecured loans are now the third-largest segment of NBFC AUM." And this segment's growth is projected to slow as a result of regulatory measures that affect NBFC AUM growth on both their asset and liability sides on three fronts," said Gurpreet Chhatwal.
According to the findings of a CareEdge Ratings' Poll, which assessed the potential impact on various lender categories if unsecured personal loans went bad, "Fintech NBFCs emerge as the most vulnerable, with private sector banks, public sector banks, and other NBFCs following in decreasing order of potential impact." This highlights the importance of a careful risk management approach, particularly for Fintech NBFCs, in handling the problems connected with the unsecured personal loan category."
CareEdge also stated that the impact on NBFCs will be twofold - 1) Banks are anticipated to change loan pricing in response to the RBI's direction to boost risk weights by 25% for advances to AAA to A-rated NBFCs. This change is designed to cover a portion of the additional capital buffers needed by the RBI, potentially resulting in a slowing of bank lending to NBFCs not covered by Priority Sector Lending (PSL) norms, particularly for firms rated A- and above. 2) Additionally, the RBI's decision to increase the risk weights on NBFCs' unsecured personal loan exposure by 25% is projected to have an impact on NBFC capital buffers. As a result, lending may see a slowdown.
As a result, lending may see a slowdown. Despite the expected hike in loan rates, mid and smaller-sized NBFCs would continue to rely heavily on the banking sector for funding. According to CareEdge Ratings, this situation will result in a higher-than-normal increase in funding via securitization and co-lending agreements, which will serve as alternate sources of liabilities for NBFCs.
Meanwhile, HDFC AMC stated, "This move by the RBI may have some impact on retail credit growth." However, because overall capital adequacy is good, the immediate balance sheet impact is not as severe at the industry level, however individual companies may need to improve capital buffers/raise capital for future growth. While the forecast for loan growth remains positive, banking sector valuations remain low. This move by the RBI speaks good for asset quality and financial stability in the medium run. The RBI's constant monitoring of the financial system and decisive efforts to maintain financial stability strengthen the outlook for overall macroeconomic stability."
