After three years of single-digit growth, non-banking financial companies (excluding housing finance companies, microfinance institutions and government-owned NBFCs) are expected to see their assets under management (AUM) grow 11-12 per cent — a four-year high — to about ₹13 lakh crore by the end of this fiscal, riding on macroeconomic tailwinds, according to CRISIL.

Disruption in business and economic activity amid Covid-19 had constrained AUM growth to 2-4 per cent in fiscals 2020 and 2021, and to about 5 per cent in fiscal 2022.

Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, said, “Even as growth touches double digits again, it will be lower than the pre-pandemic level.

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“AUM had logged a 3-year compound annual growth rate (CAGR) of close to 20 per cent through fiscal 2019. Intense competition from banks and the rising interest rate scenario will limit the competitiveness of NBFCs in certain segments, leading them to focus on higher-yield segments for growth.”

CRISIL’s assessment

As per the rating agency’s assessment, vehicle finance, which has a lion’s share (46-50 per cent) in the NBFC AUM pie, will see growth reviving to 11-13 per cent this fiscal from 3-4 per cent in the past two.

CRISIL noted that used vehicle financing, with its higher yields, will see higher growth and drive the sector’s volume. Improving the underlying asset sales will also aid AUM growth in this segment.

The agency said strong demand from the infrastructure sector as well as demand for fleet replacement and focus on last-mile connectivity will buoy commercial vehicle sales while pent-up demand and new launches will drive car and utility vehicle sales.

However, competition from banks and the rising interest rate scenario will take the edge off NBFCs in the new vehicle finance segment and allow banks to gain market share in this space.

Loan segment growth

Ajit Velonie, Director, CRISIL Ratings, said, “With NBFCs focussing on higher-yield segments, unsecured loans, which have the second-largest share (16-20 per cent) in the NBFC AUM pie, may be the only segment to touch the pre-Covid era growth of 20-22 per cent this fiscal.

“The cautious approach of NBFCs had resulted in a decline in AUM for this segment in fiscal 2021, while fiscal 2022 saw a V-shaped recovery.”

Unsecured loans comprise consumer loans (personal loans and consumer durable loans) and business loans to small and medium enterprises (SMEs).

The agency said consumer loans will be supported by rising retail spend across consumer durables, travel, and other personal consumption activities, while business loans will benefit from macroeconomic tailwinds given the expected growth of 7.3 per cent in gross domestic product (GDP) this fiscal.

Loans against property, another product suite of NBFCs catering to SMEs, are also expected to touch 10-12 per cent growth, though competition will keep higher growth at bay in this space, too.

CRISIL assessed that gold loans are expected to attain steady growth rate of 10-12 per cent supported by demand from micro enterprises and individuals – to fund working capital and personal requirements, respectively.

Wholesale finance AUM decline

As other segments revive, wholesale finance, which saw many players exiting the market over the past few years, will continue to lag with declining AUM, the agency said.

While the rebound in real estate sales and buoyancy in the infrastructure space following various government initiatives will create opportunities in the wholesale space, these will be tapped largely through the alternative investment funds route, rather than balance sheets, as NBFCs remain risk averse.

Overall, while green shoots are visible for the NBFC sector, higher-than-expected interest rates and inflation remain key monitorables, the agency said.

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