NBFCs growth to be stronger due to unsecured loans, says ICRA

economictimes.indiatimes.com:

Rating agency ICRA has revised its growth forecast for non banking finance companies (NBFCs) to 18% to 20% from 12% to 14% earlier due to likely strong demand for unsecured retail loans. However, higher cost of funds will keep margins under pressure for these lenders, the rating agency said. ICRA said that NBFC growth will come from the unsecured loans segment, consisting of personal & consumption loans, unsecured small enterprise loans and microfinance loans.

Housing finance companies will also grow albeit at a slower pace. A M Karthik, co-group head, financial sector ratings, ICRA said he expects the non housing retail segement to grow 26% to 28% in the current fiscal year driven by unsecured loans. «Secured loans consisting of vehicle finance, gold loans and secured business loans are expected to grow at a relatively sedate albeit healthy 14-16%,» he said.

To be sure the non housing retail segment grew at a robust pace of about 26% even last fiscal. Unsecured loans increased at a compounded rate of 27% over the five-year period ended FY2023, while secured loans grew at 11% during the same period. ICRA expects unsecured loans to remain the key growth driver in the current fiscal too led by cross-selling opportunites backed by digitalisation process of various business-related loans and other borrower-level information.

Evolution of credit bureaus and improved understanding of borrower-level cash flows over the years have helped also helped NBFCs fine-tune their underwriting models. However, with the rise in interest rates, the weighted average cost of funds, for NBFCs is likely to go up by 60-80 basis points in the current fiscal. One basis point is 0.01 percentage point.