As per the data for large NBFCs (assets under management or UM of Rs 10.3 lakh crore as of March 2023), the AUM grew 19% yoy in FY23, compared to 3.3% and 9.6% in FY21 and FY22, respectively.
“The revival in pent-up demand, which was dormant during the pandemic, led to the robust growth in the portfolio of NBFCs, despite the headwind of higher interest rates,” India Ratings said in a report.
The ratings firm also has a word of caution. “The capital buffers of NBFCs are adequate; however, a secular rise in the unsecured proportion of the loan book necessitates holding higher buffers to absorb credit losses,” a release by the ratings firm said.”
Ind-Ra would monitor the leverage levels along with the book composition to ensure that NBFCs have adequate buffers to absorb asset quality shocks.”
The report by the ratings firm comes weeks after credit bureau Transunion Cibil had flagged of similars concerns. In a recent report the credit bureau had noted that digital and information-oriented lending is fuelling the growth of retail credit, especially unsecured loans. “Retail credit continues to remain on a strong and steady growth trajectory. While performance across credit products is stable, some segments require close monitoring to ensure sustained and long-term growth, ” its MD and CEO Rajesh Kumar had warned.The surge in unsecured retail loans is facilitated by fintechs which have been selling such losnd by psrtnering with large NBFCs. “These NBFCs traditionally operated in different segments, but have ventured into this territory since it offers better yields and improves granularity of the book,” India Ratings said.
” While NBFCs are mindful of capping the proportion of this portfolio at a certain level, given the unsecured nature of the portfolio, the credit cost behaviour would be different than that for the secured loan book that they carry on their balance sheets”.
Credit loss protection guidelines from the regulator offer some clarity on the quantum of credit loss that can be absorbed in a partnership arrangement.
Further regulatory developments can emerge on this frontier and Ind-Ra opines that as the regulatory landscape evolves, the partnership arrangements between large and small NBFCs would gain traction.
The fintech space has also shown an increase in AUM, and Ind-Ra is of the opinion that this would see further traction as the guideline on default loss guarantee are in place
