Assets under management of NBFCs are seen growing 13-14 per cent in FY23, twice as fast as the 7 per cent FY22, led by strong demand for credit and diversification through partnerships to support growth, according to ratings agency Crisil.

“Stronger balance sheets with higher provisioning and lower leverage, receding asset-quality concerns and steadily normalising funding access provide a solid foundation for NBFCs to capitalise on credit demand,” said Gurpreet Chhatwal, MD of Crisil Ratings. 

However, high competition from banks and rising interest rates will exert pressure on margins and limit competitive ability, especially in traditional segments such as home loans and new vehicle finance.

Higher-yielding segments

“Hence, diversification into higher-yielding segments such as unsecured loans, used-vehicle loans, and secured SME2 loans will be the focus areas for the larger NBFCs,” Chhatwal said.

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As large NBFCs turn towards non-traditional segments, there are likely to be more partnerships such as co-lending with emerging NBFCs focusing on specific asset classes, especially unsecured loans.

These players could also look to increase exposure to segments such as construction finance for large developers, lease rental discounting loans, and last-mile financing, while reducing their wholesale loan book.

Home and vehicle loans

Crisil expects the housing loan segment — which comprises 40-45 per cent of NBFCs’ AUM — to grow 13-15 per cent in FY24, led by continued end-user demand despite the impact of rising real estate prices and interest rates.

Housing finance companies specifically, though, could continue to lose market share to banks owing to higher borrowing costs and competition on interest rates, especially in the urban and the formal salaried segments, Crisil said.

The second-largest segment of vehicle finance, which accounts for 20-25 per cent of NBFCs’ AUM —is seen growing 13-14 per cent in FY24 compared with around 12 per cent in the current financial year, with pent-up demand and new launches driving car and utility vehicle sales.

With interest-rate sensitivity of borrowers being high, NBFCs are expected to sharpen focus on used-vehicle financing, which offers higher yields and better profitability from a risk-adjusted return perspective, Crisil said, adding that the rebound in economic activity, demand for fleet replacement, and focus on last-mile connectivity will also support commercial vehicle sales.

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