Competitive pressure is expected to remain elevated, which will impact margins, notwithstanding the reduction in the cost of funds.
Non-banking finance companies (NBFCs) are likely to see slow down in credit growth to 13-15 per cent in FY25 and FY26 from 17 per cent growth in FY23-FY24, ICRA Ratings said today. Overall, NBFCs’ outstanding credit is expected to grow from about ₹52 lakh crore in December 2024 to over ₹60 lakh crore in FY26.
Retail loans, which constitute 58 per cent of NBFCs’ credit, will also see growth rate slowing down to 16-18 per cent in FY25-FY26 from 23 per cent growth FY23-FY24. Lower growth is expected due to the high base created in the post-Covid expansion of this segment, amid concerns of borrowing over leveraging, which has impacted loan quality in some asset segments within this space.
“Some asset segments, largely unsecured loans, namely – microfinance, personal loans, credit cards and unsecured business loans (~28 per cent of retail NBFC credit in December 2024) – have already witnessed higher stress in FY25 leading to elevated delinquencies and write-offs. While the stress is largely confined to the unsecured loans at present, in a constricted credit flow environment, refinancing ability of some of the borrower segments shall get adversely impacted. Thus, performance-secured loans availed by these borrowers, namely small-ticket vehicle loans and micro and small-ticket mortgage loans etc. shall remain a key monitorable,” said Karthik Srinivasan, Group Head Financial Sector Ratings, ICRA Ltd.
Further, competitive pressure is expected to remain elevated, which will impact margins, notwithstanding the reduction in the cost of funds.
Banks outlook stable
According to Moody’s Ratings, India’s relatively low and more diversified exports to the US are expected to limit the credit impact on its banks. The imposition of tariffs by the US has shocked financial markets, it says, raising the risk of a global economic recession. Continued uncertainty may affect business planning, delay investment, and reduce consumer confidence, potentially leading to a deterioration in global credit conditions.
However, Moody’s outlook for India’s banking system remains stable as it expects a favourable operating environment for banks, driven by government capital expenditure, tax cuts for middle-income groups, and monetary easing to boost consumption.
“Banks’ asset quality is projected to deteriorate moderately after substantial improvements in recent years, due to an increase in stress in unsecured retail loans, microfinance loans, and small business loans,” it said.
Moody’s expects lenders’ profitability to be lower than FY25, but said it remains adequate as declines in net interest margins (NIMs) are likely to be gradual. Banks will maintain strong capitalisation, supported by internal capital generation that keeps pace with asset growth and easy access to a deep domestic equity market. The Central government is also expected to provide strong support for banks in times of need, it said.
Published on April 23, 2025
