Fitch Ratings: Why Major Indian NBFIs Are Set to Thrive Despite Economic and Regulatory Hurdles

India’s large non-bank financial institutions (NBFIs) have a strong edge in dealing with economic and regulatory challenges, as reported by Fitch Ratings. While the sector is experiencing slower credit growth and profitability due to a tougher economic climate and stricter regulations, larger NBFIs continue to show resilience.

Credit growth has dropped from 18% in the fiscal year ending March 2024 to just 6.6% in recent months. This decline is largely due to sluggish economic growth, prompting Fitch to lower its GDP growth forecast for FY25 from 7.0% to 6.4%. However, the outlook for FY26 remains stable at 6.5%.

Regulatory changes over the past 18 months are contributing to the challenges. New rules have increased the cost of capital and compliance requirements for NBFIs. For instance, banks now face higher risk weights when lending to NBFIs, which affects their operations.

Smaller NBFIs bear the brunt of these changes. They often have concentrated portfolios and limited access to funding, making it tough for them to adapt. Regulatory restrictions on expanding business activities further complicate their situation.

Many NBFIs are tightening their lending standards, especially for unsecured loans. For example, microfinance disbursements dropped 10% in the second quarter of FY25, and delinquencies in this sector reached 3.8%—up from 3.0% a few months earlier. Smaller institutions are likely to remain cautious as they navigate these hurdles.

In contrast, larger NBFIs are adept at managing these changes. They are likely to achieve consistent credit growth, thanks to their established operations and access to diverse funding sources. Areas like business loans against property and new vehicle loans might slow down, but solid collateral will help maintain asset quality. Loans for gold and housing are expected to hold steady despite economic fluctuations.

Funding costs remain high, with bank lending rates not expected to drop soon. By November 2024, bank lending to NBFIs rose only 8.5% from the previous year, a significant drop from the 21% growth seen the year before. However, local mutual funds have increased their investments in NBFI debt by 51% year-on-year, brightening the outlook for larger institutions.

The immediate future for India’s NBFI sector is mixed. Larger players are poised for continued growth, while smaller and mid-sized NBFIs face more challenges. Their fate will largely depend on the economy’s stability and ongoing regulatory changes.