The Resilient Growth Story of India’s NBFC Sector
India’s Non-Banking Financial Companies (NBFCs) are poised for continued growth, supported by a robust economy, sound balance sheets, and a well-diversified portfolio. Operating in one of the world’s fastest-growing economies, NBFCs play a pivotal role in addressing the credit needs of unbanked and underbanked segments through their specialized business models and innovative credit appraisal techniques.
Economic Backdrop and Strategic Positioning
India’s status as the fifth-largest and fastest-growing large economy creates a favorable environment for credit expansion. NBFCs, with their last-mile credit delivery capabilities and strong reliance on technology, have become indispensable in the Indian financial system. They hold a significant 22% market share in the credit sector and cater to various niche segments, ranging from vehicle finance to microfinance.
Strengthened by reduced leverage ratios—from 4.5x in FY20 to 3.1x in FY24—and improved asset quality, NBFCs have demonstrated resilience even through challenges like the COVID-19 pandemic. The reduction in Net NPAs from 3.4% in FY20 to 1.1% in FY24 reflects their strengthened risk management frameworks and shift toward retail lending.
Sectoral Insights and Growth Expectations
Commercial Vehicle (CV) Financing
The CV financing segment is projected to grow at 15% in FY25, up from 11% in FY24, driven by higher ticket sizes and strong demand for used vehicles post-BS-6 norms. Asset quality is expected to improve, with GNPA levels forecasted to decline to 4.6% by FY25, while credit costs stabilize at around 2.0%.
Home Loans
Housing finance continues to perform well, with AUM growth projected at 13.5% in FY25. The segment boasts low credit costs (0.5%) and improving asset quality, with GNPA levels expected to decrease from 4.1% in FY22 to 2.6% in FY25. Challenges in this space are primarily linked to high-yield wholesale loans rather than mainstream retail loans.
Affordable Housing Finance
The affordable housing segment shows robust growth potential, with AUM expected to grow at 23% in FY25. However, GNPA and credit costs are anticipated to edge up slightly to 1.3% and 0.5%, respectively, due to the relatively higher risk profile of self-employed borrowers. Policy interventions like interest subsidies could provide additional tailwinds.
Gold Loans
The gold financing sector is expected to sustain over 15% AUM growth in FY25 despite rising competition from banks. While tonnage growth remains subdued, NBFCs are mitigating asset quality concerns through flexible auction processes. GNPA levels are projected at 2.8%, with minimal credit costs.
Microfinance Institutions (MFIs)
The microfinance sector faces significant challenges, with AUM growth projected at a modest 4% in FY25. Asset quality issues, rising credit costs (6.5%), and borrower over-leverage remain key concerns, potentially dragging RoA to 0.4%. Further deterioration in economic conditions could push credit costs as high as 8.5%, highlighting the sector’s vulnerability.
Evolving Funding Dynamics
The growing interconnectedness between banks and NBFCs is evident, with bank finance to NBFCs nearly doubling to 9.4% over the past seven years. However, the RBI’s push for funding diversification has prompted NBFCs to explore alternatives like domestic capital markets and external commercial borrowings (ECBs).
Future Outlook
NBFCs’ ability to innovate, leverage technology, and cater to underserved markets positions them as critical players in India’s financial ecosystem. Their resilience and adaptability ensure they remain key contributors to economic growth, enabling inclusive financial development and addressing credit demand in niche micro-markets.
With strengthened fundamentals and a customer-centric approach, NBFCs are well-positioned to navigate emerging challenges and capitalize on growth opportunities in India’s evolving financial landscape.
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