As per the current lending profile of the smaller NBFCs, bank loans and loans from other financial institutions such as the larger NBFCs account for almost 60 percent of the total loans. The remaining 40 percent comes from other financial institutions.
The share of loans from non-convertible debentures (NCDs) has consistently declined to 20 percent in March 2023 from 30 percent in March 2019, due to the tightening in capital markets.
In addition, securitization is also another important support in routing credit to the segment. Pass-through certificates (PTCs) are the preferred route of financing for the unsecured segment due to the high risk and limited performance of the segment, while Direct Assignment (DA) is a preferred method in the microfinance segment.
Further, co-lending has become an important source of financing for the mid-sized and small NBFCs as it helps in increasing their operating leverage and at the same time acts as a source of liquidity.
As of March 2023, co-lending accounted for nearly 28-30 percent of the off-balance sheet exposure of these entities, according to ICRA analysts.
Larger NBFCs continue to be the major participants in the co-lending space for unsecured loans, while the trend has started to improve among smaller NBFCs. Analysts expect the trend in the unsecured loan segment to continue in the future, provided asset quality remains in check.
Furthermore, they expect the joint credit system to accelerate in the auto, home loan and Loan Against Property (LAP) SME segments in the medium term.
The capital profile of larger NBFCs has improved after FY19 as growth slowed. While the smaller NBFCs are in better capital position due to regular capital inflows, which has been crucial for healthy growth, which has been sharply visible in the improvement in personal loans and unsecured SME segment.
“The smaller NBFCs have raised fresh capital to the tune of 15 to 20 per cent of their opening positions in the last four financial years, which has supported the growth of these entities,” the analysts noted.
Analysts at ICRA predict that the net worth to AUM ratio is expected to remain at 20-25 percent on a stable basis for the entities catering to the secured asset segments. Those in the unsecured loan segments are expected to operate at a ratio of 25 to 30 percent.
Further, analysts also predict that the entities in the high-growth segments of the unsecured SME, personal and consumer credit segments will witness a greater moderation in the capital profile, resulting in a need to raise capital in the coming years.
Madhushree Saggar, Senior Vice President, ICRA, said, “Consequently, entities in the unsecured SME and personal and consumer loan segments would need to raise capital over the next twelve to eighteen months to maintain a prudent capital position. MFIs and auto financiers will also look to raise capital, possibly in the second half of FY 2025.”