Non-bank and housing financers to see robust loan growth in 2024: Ind-Ra

Diversified large NBFCs might turn to public debentures.

Non-bank finance companies (NBFCs) will experience a loan growth rate of 15%-16% year-on-year (YoY) next year (FY24), building on a solid base, India Ratings and Research (Ind-Ra) projected.

Large NBFCs have diversified their product offerings, expanding beyond their traditional niches into both secured and unsecured loan categories. 

Ind-Ra said this strategic shift aims to capitalise on cross-selling opportunities, and enhance sourcing strategies through existing channels and new partnerships. Ind-Ra anticipated that a few prominent NBFCs would seek capital infusion in the second half of FY24, driven by higher capital consumption resulting from strong loan growth in FY23. 

Additionally, some NBFCs are bolstering their capital base to stay competitive, either through acquisitions, entering new product segments, or expanding their networks.

However, NBFCs face intense competition in secured lending from banks and small finance banks. This competition is expected to limit their ability to fully pass on increased borrowing costs in 2HFY24, potentially leading to margin compression of 20-25 basis points YoY in FY24. 

To counter this, some NBFCs are exploring unsecured lending opportunities through partnerships with fintech companies. Nevertheless, NBFCs offering both asset (co-lending) and liability support to fintechs must be cautious, as these loans often serve consumption-based purposes, posing a risk of borrower overleverage. 

Furthermore, the reliance on a few large fintech originators could expose all lenders to cascading risks if the fintech funding environment tightens due to concerns about asset quality.

To partially mitigate margin pressure, NBFCs may opportunistically increase short-term borrowings through commercial papers, aligning them with the proportion of short-term assets on their balance sheets to manage asset-liability tenors. Diversified large NBFCs may also shift toward public debentures to enhance the granularity of their overall funding mix, given the muted demand for long-duration bonds from mutual funds.

While credit costs in FY24 are expected to remain similar to those in FY23, stage 3 assets may marginally increase to around 3.8% at the end of FY24 (compared to 3.5% in FY23). 

Ind-Ra suggests that NBFCs will need to carefully manage margins in FY24, considering the elevated borrowing costs and limited flexibility in passing on rate hikes in the secured lending segments due to competition from banks and borrower repayment capacity considerations.

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Housing finance companies

Housing finance companies (HFCs) are expected to see loan growth in FY24, driven by increasing home ownership and upscaling, particularly in metro and tier 1 cities. However, Ind-Ra noted that challenges are emerging due to rising interest rates, inflationary pressures on savings, and increased property prices driven by higher construction costs, impacting borrowers' affordability. 

Loan growth could vary across large ticket and affordable housing players in FY24. While affordable housing players are expected to achieve around 16% loan growth in FY24, the overall sector's growth is projected to be in the range of 13%-14%. Margins in the sector may come under pressure as liabilities get repriced in 2HFY24, and banks intensively compete for customers.

 HFCs are likely to focus on and expand their non-housing finance segment, including construction finance and loans against property, to balance margin pressures in the pure housing segment. 

Ind-Ra believes the sector could witness a slight increase in gross stage 3 assets to 3.17% in FY24 (compared to 3.1% in FY23), primarily due to inflationary pressures affecting borrower cashflows and a recent slowdown in wage growth.