NBFCs Must Prioritize Product Diversification and Funding Profile, says Crisil
Introduction
According to Crisil Ratings, non-banking financial companies (NBFCs) will need to focus on diversifying their product offerings and funding profiles in the coming fiscal year. This is in response to the expected moderation in the growth of assets under management (AUM) next year.
Slowdown in Non-Bank AUM Growth
Crisil predicts that non-bank AUM will grow by 14-17% in fiscal year 2025, which is slightly lower than the expected expansion of 16-18% in the current fiscal year. The slowdown can be attributed, in part, to the anticipated deceleration in unsecured retail loans. These loans have traditionally been the fastest-growing segment for NBFCs. However, recent regulatory measures issued by the Reserve Bank of India (RBI) have prompted NBFCs to recalibrate their strategies.
Importance of Product Diversification
NBFCs must prioritize product diversification as it is a key agenda for companies that excel in serving difficult-to-reach customer segments. This diversification can be achieved through organic growth, strategic partnerships, and inorganic expansion. Krishnan Sitaraman, Senior Director and Chief Ratings Officer at Crisil Ratings, emphasizes the importance of expanding product offerings to better cater to diverse customer segments.
Reducing Reliance on Bank Borrowings
RBI Governor Shaktikanta Das has advised NBFCs to reduce their reliance on bank borrowings. Over the last five years, bank borrowings for NBFCs have grown at a compound annual growth rate of 18% and stood at ₹12.3 trillion as of September. To secure stable funding, NBFCs will need to explore strategic co-lending and debt capital funding options. Broadbasing funding sources and reducing dependence on banks will be key for the long-term sustainability of NBFCs.
Regulatory Measures and Impact on NBFCs
The recent regulatory measures primarily target unsecured retail loans and do not affect secured asset classes. Therefore, growth in segments such as home loans and vehicle finance is expected to remain steady. Crisil highlights that home loans and vehicle finance together constitute 25-27% of the NBFC AUM. In the home loan segment, the focus on affordable home loans (ticket sizes below ₹25 lakh) by housing finance companies is expected to drive growth of 12-14% next fiscal year. Vehicle finance is predicted to grow by 18-19% this fiscal year and 17-18% next fiscal year, supported by strong underlying asset sales.
Conclusion
In order to navigate the changing landscape of the NBFC sector, companies must prioritize product diversification and funding profile optimization. By expanding their range of offerings and diversifying funding sources, NBFCs can ensure consistent and stable growth. Additionally, reducing reliance on bank borrowings and exploring alternative financing options will contribute to their long-term success.
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