NBFC Sector: Resilient Growth Amid Pressures

The Non-Banking Financial Company (NBFC) sector in India exhibited steady AUM growth, resilient profitability, and stable asset quality in Q3FY25. While disbursement trends remained mixed, operational efficiencies and product innovation supported earnings. Some companies faced margin compression due to higher cost of funds (CoF), while others leveraged diversified product portfolios to sustain spreads.

Key trends observed in the NBFC Sector:

• Strong AUM growth across key players, despite some moderation in disbursements.
• Net Interest Margins (NIMs) under pressure, but spreads remained stable.
• Credit costs increased in select segments, particularly unsecured retail and microfinance.
• Asset quality saw moderate deterioration, though overall provisioning remains comfortable.
• Growth in vehicle finance, gold loans, and MSME lending drove profitability.

Key Performance Metrics & Sector Trends

1. AUM & Disbursement Growth

• AUM expansion remained strong, with most NBFCs growing between 15%-30% YoY.
• Disbursements varied across segments, with strong growth in secured lending segments such as MSME loans, vehicle finance, and gold loans, while moderation was seen in unsecured lending and certain housing finance categories.
• Affordable housing loans and rural lending continued to gain traction, though regulatory changes and external factors like delays in property registration in some states impacted growth.

2. Margins & Cost of Borrowing

• NIMs remained largely stable QoQ but showed a slight YoY contraction due to rising borrowing costs.
• Spreads held steady despite cost pressures, supported by a better loan mix and efficient pricing strategies.
• NBFCs optimized funding through external commercial borrowings (ECB) and capital market issuances, ensuring strong liquidity buffers.

3. Asset Quality & Credit Costs

• Some NBFCs saw rising stress in unsecured lending, MSME, and microfinance segments, leading to higher credit costs.
• Vehicle finance showed signs of recovery in select segments, while commercial vehicle (CV) lending remains under pressure.
• Gold loans and secured lending continued to maintain strong asset quality, contributing to lower risk-weighted AUM growth.
• Delinquency trends improved toward the quarter-end, with expectations of stabilization in Q4FY25.

4. Sectoral Shifts & Strategic Outlook

• NBFCs are recalibrating lending portfolios, focusing on secured assets to sustain profitability.
• Tighter credit screening and risk-adjusted lending strategies are being implemented to mitigate risk in unsecured portfolios.
• Partnerships with fintechs and digital lenders are enhancing financial inclusion and last-mile credit delivery.
• Liquidity management remains a key focus, with strong capital buffers maintained to navigate potential funding volatility.

Conclusion & Outlook for the NBFC Sector

Despite pockets of stress in unsecured lending and MSME segments, NBFCs overall delivered robust earnings and stable asset quality overall in Q3FY25. AUM growth remains strong, and NBFCs are adopting tighter credit screening, product diversification, and cost optimization to sustain profitability. While NIM pressures and rising credit costs pose near-term risks, a gradual recovery in asset quality is expected from Q4FY25 onward.

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