ICRA Survey of Non-banking

Financial Companies

Issuer optimism for FY2025 could be

dented by the recent regulatory
developments

MARCH 2024
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List of abbreviations
AUM: Assets under management NBFC-IFCs: Non-banking finance company – Infrastructure finance
company
CAGR: Compound annual growth rate
NBFC-IDFs: Non-banking finance company – Infrastructure debt fund
GNPA: Gross non-performing assets
RoMA: Return on managed assets
GS3: Gross stage 3
SME: Small and medium enterprise
HFC: Housing finance company
YoY: Year-on-year
LAP: Loan against property

MFI: Microfinance institution

NBFC: Non-banking financial company

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Highlights
Click to Provide Feedback
Lenders continue to be optimistic on
growth; 54% of the issuers (by AUM)
project higher-than-20% AUM growth
in FY2025.
Lenders unanimously expect
improvement in asset quality
indicators.
Despite expected uptick in cost of
funds, issuers expect profitability to
remain largely stable in FY2025.
▪ ICRA conducted a survey across NBFCs in Feb 2024 to gauge their outlook and expectations for
FY2025. Our survey revealed that issuers had not moderated their growth plans and expected the
robust pace to continue into FY2025. However, recent regulatory actions may dampen growth
aspirations in FY2025 and reorient them to augment their internal controls and compliances.
▪ Issuers are not expecting the share of unsecured loans to increase further from current levels.
Consequently, any further boost in profitability due to such high yielding segments is expected to
be limited.
▪ While Issuers expect further improvement in the asset quality indicators, ICRA expects some
increase in delinquencies as the portfolio built over the last couple of years starts to season.
▪ While changes in the regulatory landscape would result in increase in cost of borrowings; the
entities expect stable return indicators (return on managed assets), on the back of business
growth and lower credit costs.
▪ Most lenders (by AUM) do not expect to raise capital in the near term. However, company-
specific capital raise could be used to fund the high envisaged growth. Lenders plan to maintain
the liquidity at current levels.
▪ Larger entities looking to diversify the funding mix and are likely to include higher incremental
share of capital market borrowings, external commercial borrowings and securitisation. Share of
co-lending expected to remain range-bound at less than 10% of AUM.
▪ ICRA estimates AUM growth to moderate in FY2025 on the back of high expansion witnessed in
FY2023 and FY2024 along with tightening regulations and liquidity. The regulatory interventions
could continue, in ICRA’s view, if the sector’s breakneck growth does not moderate.
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Survey sample forms about two-thirds of the retail-NBFC industry AUM

Exhibit: Break-up of sample Exhibit: Break-up of sample

entities by sector (number) Exhibit: Break-up of sample entities based on AUM (in Rs. crore)
entities by sector (AUM shares)

18 > 50,000
33% 20,001 - 50,000 13%
11%
< 5,000
42%

38
63%
8 5,000 - 10,000
4%
22%

15,000 - 20,000 10,001 - 15,000

3% 9%
HFC MFI NBFC HFC MFI NBFC <5000 10,001 - 15,000 15,000 - 20,000 5,000 - 10,000 20,001 - 50,000 > 50,000

Source: ICRA Research Source: ICRA Research

▪ The analysis presented in the following slides is based on the aggregate results of ICRA’s survey of various NBFCs/HFCs/MFIs conducted in February 2024;
these entities constitute about two-thirds of the Retail-NBFC industry AUM (excluding NBFC-IFCs and NBFC-IDFs).

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Growth plans remain intact despite recent regulatory developments

Exhibit: Break-up of entities by number Exhibit: Break-up of entities by AUM

Growth plans Growth plans

moderated, moderated, 7%
Growth 17% Growth
expected to be expected to be
higher than higher than
envisaged, 8% envisaged, 13%

No change in
No change in growth plans,
growth plans, 80%
75%

Source: ICRA Research Source: ICRA Research

▪ When the survey was conducted in Feb 2024, issuers were optimistic on FY2025 growth. However, supervisory actions on some of the entities and regulatory
tightening for the NBFC sector in general indicates the regulator’s concern following the high credit growth in the space.
▪ The operational, governance and other credit assessment-related lapses in entities, which were observed during the RBI annual inspections and other audits,
in view of the increased systemic importance of the sector, seem to be the key driver for the recent actions. Thus, entities might increase the focus on
tightening internal controls and ensure adherence to all regulatory and prudential norm, in our view.
▪ Given the concerns highlighted, if the pace of growth does not moderate, ICRA anticipates that further regulatory tightening is possible in FY2025 as well.

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More than half of issuers (by COMPARING
AUM) target higherBRANDS
than 20% growth in FY2025

Exhibit: Share of entities (by AUM) expecting an AUM growth of over 20% in FY2025
67% HFCs by number expecting over
NBFC^ HFC 20% growth in AUM, indicating small MFI
and medium HFCs expecting strong
growth momentum to continue

VS VS
73% 14% 75%

ICRA’s growth ICRA’s growth ICRA’s growth

expectation*: 17-19% expectation*: 12-14% expectation*: 23-25%

Source: ICRA Research; Note: ^NBFC (Excluding HFC and NBFC-IFC) , * for FY2025
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Issuers not expecting the share of unsecured loans to go up in FY2025

Exhibit: Trend in share of key retail asset segments for the sector – ICRA’s
Exhibit: Share of unsecured loans in total AUM by March 2025
outlook

80% 100% 5% 3% 5% 3% 6% 4% 8% 9% 8% 4% 10%

3% 3% 4% 12% 13% 13%
70% 7% 7% 4%
6% 5%
5% 6% 4% 6% 4%
6% 7%
5% 5% 5%
75% 6% 7% 7% 8% 8%
20% 19% 18% 18% 6% 6% 6%
60% 16% 16% 15% 15% 15% 15%
50% 50% 25% 30% 31% 31% 29% 29% 31% 28% 27% 27%
40% 25%
37% 33% 31% 30% 30% 30% 28%
30% 26% 26% 25%
0%
20%

Mar-17

Mar-20

Mar-23
Mar-16

Mar-18

Mar-19

Mar-21

Mar-22

Mar-24P

Mar-25P
10%
0%
Increase from December Lower than December Same as December 2023 Vehicle HL LAP/Secured SME
2023 levels 2023 levels levels Gold MFI Unsecured SME
Personal-Consumption loans

Source: ICRA Research Source: ICRA Research

▪ Unsecured loans, i.e., microfinance, SME loans and personal consumption finance, have sustained their growth at a stronger pace vis-à-vis the overall NBFC
retail assets growth.
▪ Unsecured loans grew at a CAGR of 27% during the five-year period ended March 2023 compared to 11% for secured loans.
▪ Within the unsecured loan book, ICRA expects some slowdown in growth of personal consumption loans as recent regulatory scrutiny and measures would
impact the capital and funding availability for entities in this segment.

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Issuers unanimously expect asset quality to improve in FY2025

Exhibit : Share of issuers (by AUM) expecting 100 bps or more improvement
Exhibit : Gross stage 3 (GS3) trend and outlook by ICRA
in asset quality over December 2023 level
7.0% 6.2%
5.7% 5.6%
6.0%
4.8% NBFC
5.0% 4.4% 4.5% 4.6% 3.2% 3.0% 3.0% 3.3%
4.3% 4.1%
3.8% 5.1% 4.0%
4.9% 3.4% 3.2% 3.5%
4.0% 4.5% 4.5% 4.4% 3.7%
4.2% 4.0%
3.0% 3.8% 3.3% 3.0% MFI
3.5% 2.7%
2.0% 2.8%
3.1% 3.0% 2.8% 2.5%
1.0% 1.5% HFC
1.2%
0.0%
Mar-18 Mar-20 Jun-21 Dec-21 Jun-22 Dec-22 Jun-23 Dec-23 Mar-25E
92% 93% 94% 95% 96% 97% 98% 99% 100%
NBFC (B) NBFC (S) HFCs (B) HFCs (S)

Source: ICRA Research Source: ICRA Research

▪ Incrementally, ICRA expects the GS3 to start bottoming out over the next few quarters and start inching up as the sectoral growth moderates; however,
issuers are more bullish on the asset quality and largely expect improvement in FY2025.

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Expected increase in cost of borrowings in next 15 months

Over 85% of the issuers by AUM expect up to 20 bps increase in cost of borrowings

Exhibit : Expectation on increase in cost of borrowings (by AUM)

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
HFC MFI NBFC
21 - 30 bps 31 - 50 bps 50 - 100 bps Up to 20 bps

Source: ICRA Research

▪ ICRA expects regulatory developments and tighter liquidity to push up the weighted average cost of funds (CoF) by 30-50 basis points (bps) in H2 FY2024 and
further 20-30 bps in FY2025

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Most players expect profitability to remain stable

Exhibit: Expected return on managed assets in FY2025

NBFC 5% 27% 49%

MFI 69% 0% 16%

HFC 18% 0% 74%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Improve over FY2024 by 50-100 bps Improve over FY2024 by over 100 bps Improve over FY2024 by upto 50 bps Lower than FY2024 Similar to FY2024

Source: ICRA Research

▪ HFCs expect a more stable performance to continue in FY2025, while MFIs expect improvement in return indicators.
▪ NBFCs have slightly divergent views with some issuers also expecting moderation in return indicators in FY2025. Overall, 76% of issuers expect stable or
marginally lower profitability.
▪ ICRA expects profitability of NBFCs to moderate by 20- 40 bps on a YoY basis, while HFCs are expected to report stable profitability indicators in FY2025;
MFI profitability is expected to marginally improve by 10-20 bps.

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 COMPARING
Larger players not expecting to raise capital BRANDS
Smaller peers likely to raise capital

Break-up by numbers Break-up by AUM

Entities
planning to
raise capital
in next 15
55% months 25%

Source: ICRA Research

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 MARKETING
Co-lending not expected to INFOGRAPHIC
contribute significantly to AUM

~20% of the issuers (by number) expect co-lending/fintech partnership book to constitute over 15% of the overall AUM by March 2025

Exhibit: Share of co-lending/fintech partnerships in overall AUM by March 2025 Expectations of lower share of co-lending/partnership-
(by number) based business in the overall AUM, driven by asset
100% quality concerns and tighter regulations on digital
lending.
90%
80%
70% Other challenges with co-lending include issues in system
integration, and upfront income booking related
60%
concerns.
50% 100%
40%
72% 71%
30% Fund availability for growth will continue to be a key
20% driver for co-lending. Thus, smaller entities with limited
financial flexibility might look at this route more often.
10%
0%
HFC MFI NBFC
<10% >25% 11-15% 16-20% 21-25% Larger NBFCs/banks might continue to use co-lending for
testing new products.
Source: ICRA Research

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 OPTION
Will the share of banks in funding COMPARISON
mix reduce in 15 months?

Larger entities are expecting the share of bank funding to reduce and the share of capital market borrowings to increase; smaller peers
to rely more on securitisation and co-lending

38% A

Share by
number Yes
Share by
AUM

B
52%
Source: ICRA Research
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Liquidity expected to be maintained

Exhibit: Will the on-balance sheet liquidity reduce in the next 15 months
Exhibit: Cash and investment as % of total assets
from December 2023 level?

Yes, 2% 12%
10% 10% 10%
10% 9% 9%
9% 8% 8%
8%
7% 7% 6%
6% 5%
5%
4% 3%

2%

0%
Mar-18 Mar-19 Mar-20 Mar-21 Mar-22 Mar-23 Sep-23(E)
No, 98%
NBFC HFC

Source: ICRA Research Source: ICRA Research; E-estimated

▪ On-balance sheet liquidity of NBFCs and HFCs has continued to moderate over the historical levels; however, entities plan to maintain liquidity at similar
levels, going forward.
▪ The requirement for maintaining high quality liquid assets (HQLA) is also contributing to this liquidity.

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 Analytical Contact Details
Name Designation Email Contact Number

Karthik Srinivasan Senior Vice President, Group Head karthiks@icraindia.com +91-22-61143444

A M Karthik Senior Vice President, Co-Group Head a.karthik@icraindia.com +91-44-45964308

Manushree Saggar Senior Vice President, Sector Head manushrees@icraindia.com +91-124-4545316

R Srinivasan Vice President, Sector Head r.srinivasan@icraindia.com +91-44-45964315

Prateek Mittal Assistant Vice President, Sector Head prateek.mittal@icraindia.com +91-33-71501100

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Name Designation Email Contact Number

L Shivakumar Chief Business Officer shivakumar@icraindia.com 022-61693304

Neha Agarwal Head – Research Sales neha.agarwal@icraindia.com 022-61693338

Rohit Gupta Head Business Development – Infrastructure Sector rohitg@icraindia.com 0124-4545340

Vivek Bhalla Head Business Development – Financial Sector vivek.bhalla@icraindia.com 022-61693372

Vipin Saboo Head Business Development – Corporate Sector - West & East vipin.saboo@icraindia.com 022-61693348

Shivam Bhatia Head Business Development – Corporate Sector - North & South shivam.bhatia@icraindia.com 0124-4545803

Naznin Prodhani Head – Group Corporate Communications & Media Relations communications@icraindia.com 0124-4545860

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