NBFCs’ gross bad loans to rise by 30-50 bps in FY25: ICRA

Non-banking finance companies (NBFCs) will likely see their gross stage-3 asset ratio or gross bad loans rising by 30-50 basis points (bps) in the current financial year, from 2.8 per cent in FY24, domestic rating agency ICRA said in a webinar today.

“Slower growth and portfolio seasoning following the steep credit expansion in the retail asset segments in the last two fiscals would become visible in asset quality performance in FY25,” it said. Concerns related to over-leveraging and increased share of unsecured loans also exists, posing elevated loan quality risk for the sector.

The share of unsecured loans — for personal and business purposes — expanded to 11 per cent of the sector’s assets under management (AUM) in March 2024, from 7 per cent in March 2021. While NBFCs are likely to see higher bad loans, shadow lenders in the infrastructure and housing loan segment will see their gross bad loans ratio improving by 10-20 bps in the current fiscal, ICRA said.

Funding woes

NBFCs will witness headwinds related to funding availability, which is likely to impede growth, as against the robust expansion in the last two fiscals. AUM growth will likely ease to 13-15 per cent in FY25, from 18 per cent in FY24.

“Key challenges in meeting growth expectations, however, would be in accessing the required debt funding over and above the refinancing of existing debt. The estimated incremental debt funding for AUM expansion is ₹5.6-6 trillion for FY25,” it said. Notwithstanding the sizeable demand and unmet credit requirements, the downside risk to the indicated NBFC AUM growth would accentuate if the tight funding environment, as witnessed in Q1FY25, continues for a prolonged period in the current fiscal.

While bank funding to NBFCs witnessed a dip after the Reserve Bank of India (RBI) hiked the risk weight on such loans late last year, mutual funds have become another large funding source for shadow lenders. According to CareEdge Ratings, mutual funds’ (MF) debt exposure to NBFCs, including Commercial Paper (CP) and Corporate Debt, remained above the ₹2-trillion mark for the third consecutive month, touching ₹2.21 trillion in June 2024. This marks a 36 per cent increase on a yearly basis and 5.6 per cent sequentially.

Further, deposit challenges faced by banks and the push for NBFCs to diversify their borrowing profile will likely lead to NBFCs’ cost of funds increasing by 20-40 bps over FY24 levels.

“The elevated cost of funds, increased competitive pressure from banks, slowing growth and asset quality challenges would result in weakening profitability for the NBFCs, which is expected to decline by 25-45 bps vis-à-vis FY2024 levels,” the rating agency said.