After three years of single-digit growth, non-banking financial companies (NBFCs)¹ are expected to see their assets under management (AUM) grow 11-12% — a four-year high — to ~Rs 13 lakh crore by the end of this fiscal, riding on macroeconomic tailwinds.

Disruption in business and economic activity amid Covid-19 had constrained AUM growth to 2-4% in fiscals 2020 and 2021, and to ~5% in fiscal 2022 (see Annexure A).

Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, Crisil Ratings, “Even as growth touches double digits again, it will be lower than the pre-pandemic level. Indeed, AUM had logged a 3-year compound annual growth rate (CAGR) of close to 20% through fiscal 2019. Intense competition from banks and the rising interest rate scenario will limit the competitiveness of NBFCs in certain segments, leading them to focus on higher-yield segments for growth.”

Vehicle finance, which has a lion’s share (46-50%) in the NBFC AUM pie, will see growth reviving to 11-13% this fiscal from 3-4% in the past two (see Annexure B). Used vehicle financing, with its higher yields, will see higher growth and will drive the NBFC volume in vehicle finance. Improving underlying asset sales will also aid AUM growth in this segment. Strong demand from the infrastructure sector as well as demand for fleet replacement and focus on last-mile connectivity will buoy commercial vehicle sales while pent-up demand and new launches will drive car and utility vehicle sales. However, competition from banks and the rising interest rate scenario will take the edge off NBFCs in the new vehicle finance segment and allow banks to gain market share in this space.

Says Ajit Velonie, Director, Crisil Ratings, “With NBFCs focussing on higher-yield segments, unsecured loans, which have the second-largest share (16-20%) in the NBFC AUM pie, may be the only segment to touch the pre-Covid era growth of 20-22% this fiscal. The cautious approach of NBFCs had resulted in a decline in AUM for this segment in fiscal 2021, while fiscal 2022 saw a V-shaped recovery.”

Unsecured loans comprise consumer loans (personal loans and consumer durable loans) and business loans to small and medium enterprises (SMEs). Consumer loans will be supported by rising retail spend across consumer durables, travel, and other personal consumption activities, while business loans will benefit from macroeconomic tailwinds given the expected growth of 7.3% in gross domestic product (GDP) this fiscal.

Loans against property, another product suite of NBFCs catering to SMEs, is also expected to touch 10-12% growth, though competition will keep higher growth at bay in this space, too.

Gold loans are expected to attain their steady state growth rate of 10-12% supported by demand from micro enterprises and individuals – to fund working capital and personal requirements, respectively.

As other segments revive, wholesale finance, which has seen a number of players exit the market over the past few years, will continue to lag with declining AUM. While the rebound in real estate sales and buoyancy in the infrastructure space following various government initiatives will create opportunities in the wholesale space, these will be tapped largely through the alternative investment funds route, rather than balance sheets, as NBFCs remain risk averse.

Overall, while green shoots are visible for the NBFC sector, higher-than-expected interest rates and inflation remain key monitorables.

¹ Excluding housing finance companies, microfinance institutions and government-owned NBFCs

Annexure