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Informist, Friday, Nov. 29, 2024

--Fitch: Expect Indian fincl cos' asset quality challenges to subside 2025 

--Fitch: Expect India fincl cos' impairments in riskier loan segments to rise 

--Fitch: See India fincl cos' credit growth down as banks' risk appetite low 

--Fitch: See rate of loan growth of Indian fincl sector in mid-teens 2025 

MUMBAI – Fitch Ratings on Friday said it sees credit growth of Indian financial companies moderating in 2025 because of funding challenges, mainly due to the lower risk appetite of banks. Banks, which form the largest source of funding for non-bank finance companies, have been wary of lending to the sector ever since the Reserve Bank of India increased the risk weight on their loans to NBFCs, the rating agency said in a report.

"Increased risk weights and regulatory scrutiny will also contribute to reducing risk appetites amongst FLCs (finance and leasing companies)," Fitch Ratings said. In November last year, the Reserve Bank of India increased the risk weight on credit exposure of banks to NBFCs by 25%, over and above the risk weight associated with the rating of such non-bank lenders. The RBI also increased the risk weight of commercial banks and non-banking finance companies on consumer loans, including personal loans, to 125% from 100% earlier. Further, it increased the risk weight on credit card receivables of banks to 150% from 125% and those of NBFCs to 125% from 100%.

As an alternative to bank lending, financial companies may look to raise funds from domestic capital markets and offshore, due to the increasingly attractive pricing relative to local bank loans, Fitch Ratings said.

Borrowing costs for non-bank lenders may also remain high as the expected rate cuts by the RBI in 2025 may not be fully transmitted to banks' lending rates. Despite these challenges, the rate of loan growth for the sector should remain in mid-teens, the rating agency said. The fall in loan growth may end up in lower net interest margins but adequate loan volumes and manageable credit costs should support profitability, Fitch Ratings said.

Fitch Ratings also alluded to the recent stress in the micro-finance loans segment of Indian non-bank lenders. "Increased risk taking in India, particularly in unsecured lending and microfinance, has compounded the issues," it said.

The credit deterioration that the sector has seen after a period of fast loan growth and high cost of living pressures on the lower income segment, is expected to subside gradually over the next year. "However, we expect the deterioration to remain contained, mitigated by a broadly supportive economy and tightened risk management and recovery practices in the past few years," Fitch Ratings said.

Even though non-performing loan ratios of major Indian financial companies have remained fairly steady in aggregate, impairments in riskier loan segments will continue to rise for the next few months, before stabilising later in 2025, Fitch Ratings said. Talking about the recent tightening around the sector by the RBI, Fitch Ratings said it could prompt investor caution over the sector near term, but should strengthen governance in the longer run.  End

Reported by Kabir Sharma

Edited by Ashish Shirke

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