Indian NBFIs Navigate Through Economic and Regulatory Challenges

According to Fitch Ratings, India's large non-bank financial institutions (NBFIs) are better equipped to handle the ongoing economic and regulatory challenges than their smaller counterparts. Despite facing softer economic conditions, tighter bank funding, and concerns over asset quality, these larger institutions are expected to maintain a steady performance thanks to their robust operations and diversified funding channels.

Impact on Credit Growth and Profitability

The sector's loan growth has seen a deceleration from the high of 18% recorded in the fiscal year ending March 2024 (FY24), with credit growth for NBFIs, excluding housing finance companies, moderating to 6.6% between March and September 2024. This slowdown is partly due to weaker economic growth, with Fitch revising its FY25 GDP growth forecast to 6.4% in December 2024, down from 7.0%.

Regulatory Tightening and Its Effects

Regulatory measures introduced over the past 18 months, including higher risk weights on bank lending to NBFIs and unsecured loans, as well as stricter rules on gold-backed loans and microfinance, have raised the cost of capital and increased compliance requirements. This has particularly impacted mid-sized and smaller NBFIs, which may face greater difficulties due to concentrated portfolios and limited access to funding.

Looking Ahead

Despite these challenges, larger NBFIs are expected to sustain mid-to-high-teen credit growth in the coming years, supported by their established operations and access to diverse funding sources. The long-term prospects of India's NBFI sector remain tied to broader economic stability and regulatory developments.