May 20, 2024

Credit rating agency ICRA projected the debt funding for Medium & Small Non-Banking Financial Companies (NBFCs) to be at Rs 2.2 trillion over the next two years, i.e., by the financial years 2024 and 2025, due to high growth and limited fundraise expected by most of the entities. As per the agency’s projections, the Assets Under Management (AUM) of the industry is expected to grow at a rate of 25 to 30 per cent compound annual growth rate (CAGR) in this time period.

As per the current borrowing profile of the smaller NBFCs, bank loans and loans from other financial institutions like the larger NBFCs account for nearly 60 per cent of the overall borrowing. The remaining 40 per cent comes from other financial institutions.

The share of borrowing from Non-Convertible Debentures (NCDs) has consistently come down to 20 per cent as of March 2023, compared to 30 per cent as of March 2019, due to the tightening in capital markets.

In addition, securitisation is also another key support in routing credit to the segment. Pass-through certificates (PTCs) are the preferred route for funding for the unsecured segment because of the high risk and limited performance of the segment, whereas Direct Assignment (DA) is a preferred method in the microfinance segment.

Further, co-lending has emerged as a key source of funding for the medium and small NBFCs as it helps in augmenting their operating leverage along with acting as a source of liquidity.

As per the analysts at ICRA, co-lending accounted for nearly 28-30 per cent of the off-balance sheet exposure of these entities as of March 2023.

Larger NBFCs continue to be the key participants in the co-lending space for the unsecured loan, whereas the trend has started to pick up among the smaller NBFCs. Going forward, analysts expect the trend in the unsecured loan segment to continue, subject to the condition that asset quality remains under control.

Further, they expect the co-lending system to pick up pace in the vehicle, home loans, and the Loan Against Property (LAP) SME segments over the medium term.

The capital profile of the larger NBFCs has improved after FY 2019 as the growth slowed down. Whereas, the smaller NBFCs have a better capital position due to the regular infusion of capital which has been crucial in the healthy growth, which was sharply visible in the improvement of personal loans and the unsecured SME segment.

“The smaller NBFCs raised fresh capital in the range of 15-20 per cent of their opening net worth positions in the last four financial years, which has supported the growth for these entities,” the analysts noted.

Analysts at ICRA project the net worth to AUM ratio is expected to remain at 20-25 per cent on a steady-state basis for the entities focused on the secured asset segments. Those in the unsecured loan segments are expected to operate at a 25-30 per cent ratio.

Further, analysts also project the entities in high growth segments of unsecured SME, personal, and consumption loan segments to witness steeper moderation in capital profile resulting in a need to raise capital in the upcoming years.

Madhushree Saggar, Senior Vice President of ICRA, said, “Consequently, entities in unsecured SME and personal and consumption loan segments would be required to raise capital in the next 12-18 months in order to maintain a prudent capital position. MFIs and vehicle financiers shall also look to raise capital, possibly in the latter half of FY 2025.”