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Risk management and regulatory compliance more important than ever

Loan growth outlook slightly weakens; asset quality a key monitorable

We attended an NBFC industry seminar hosted by CRISIL Ratings, featuring various industry experts who shared their insights on the overall NBFC sector, mortgage financiers, vehicle financiers and diversified/specialized lenders. Here are the key takeaways from the seminar: 1) NBFCs’ AUM growth could moderate to ~15%-17% in FY25 and FY26 from stronger growth of ~23% in FY24 due to an expected slowdown in unsecured personal and microfinance loans, among other factors; 2) Technology will play a crucial role in the current evolving regulatory environment; 3) Potential/expected rate cuts in India will have differential impact on NBFCs basis their relative share of fixed- and floating-rate advances and liabilities4) For NBFCs, while it is important to manage the risk on the assets side, it is even more important to manage liability risk; 5) Asset quality will remain range-bound for most of the segments; however, unsecured personal loans and MFI could continue to see volatility.

Outlook on the overall NBFC Sector

* NBFCs faced significant challenges during the Covid-19 pandemic but witnessed a strong recovery in FY23 and solidified their resilience in FY24 with robust AUM growth. AUM grew from ~INR2t at the turn of the century to ~INR32t in FY24, highlighting the sector's stable growth trajectory.

* Over the past 15 years, no NBFC has defaulted due to business-related reasons. The defaults that did occur were primarily attributed to issues such as fraud, control lapses, etc.

* NBFCs are poised to benefit from a growing economy, but they must adapt to an evolving regulatory landscape. To achieve sustainable growth, NBFCs must focus on risk management. Recent regulatory changes have strengthened NBFCs by improving their risk management frameworks, liquidity positions, and IT capabilities.

* While the sector has been facing increased regulatory scrutiny in recent years, segments like home loans and vehicle loans remain relatively strong, with a minimal impact on asset quality. However, compared to FY24, growth across segments is expected to moderate, with the most significant slowdown anticipated in unsecured retail loans.

* With potential rate cuts on the horizon, funding diversification becomes increasingly critical, especially as bank lending to NBFCs has slowed. The lenders with a lower proportion of floating-rate assets and a higher proportion of floating-rate liabilities stand to benefit the most from a rate cut.

* Asset quality is expected to remain stable across most segments, though some volatility may arise in unsecured personal loans and MFI loans.

* Summary:

Overall profitability is expected to decline due to higher credit costs, but should still remain healthy. The balance sheets of NBFCs are likely to stay robust, supporting their medium-term outlook. To navigate this challenging environment, NBFCs will need to strengthen their risk management practices in underwriting, collection monitoring and technology.

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