Borrowing costs of Indian NBFCs to stay elevated in 2025, says Fitch

Global rating agency Fitch has said that borrowing costs for Indian non-banking finance companies (NBFCs) are expected to remain elevated in 2025, as the projected policy rate cuts may not be fully transmitted through banks’ lending rates. This will likely continue to pressure their net interest margins (NIMs), but adequate loan volumes and manageable credit costs should support profitability.

 

Domestic bank lending to Indian finance companies had decelerated to 14 per cent year-on-year (Y-o-Y) at end-August 2024 (FY23: 32 per cent). This is attributed to declining excess liquidity and the regulator’s objective to reduce financial system interdependencies, as seen in the increased regulatory risk weights on loans to financial leasing companies (FLCs) from 2023. Fitch released its Market Finance and Leasing Companies Outlook 2025.

 

 

Large FLCs should still receive sufficient funding from banks, although at higher interest rates. Fitch believes they will also continue to raise funds from domestic capital markets and offshore sources due to the increasingly attractive pricing relative to local bank loans. “We expect pressure on leverage to ease as loan growth moderates (average debt-to-equity for Fitch-monitored issuers of 4.4x at FY24-end),” it added.

 

Manageable asset-quality pressure points

 

Fitch said that pockets of weakness in certain product segments will exert some pressure on asset-quality metrics in the near term. “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,” it added.

 

The recent asset-quality weakness in unsecured personal loans and microfinance is expected to improve over the next year as lenders have tightened their credit policies since mid-2024. Increased risk weights and regulatory scrutiny will also contribute to reducing risk appetites among finance firms.

 

Continuing economic activity underpins outlook

 

Fitch expects ongoing economic activity to provide continued lending opportunities for Indian FLCs.

 

“We project gross domestic product (GDP) growth to remain broadly sound in the coming year, albeit moderating from a high of 8.2 per cent in the financial year ending March 2024 (FY24).

 

Waning inflation should gradually ease the pressure on borrowers’ finances and local policy rates. This drives our neutral sub-sector outlook for Indian finance companies. Recent regulatory actions on certain NBFCs could prompt investor caution over the sector in the near term, but should strengthen governance in the longer run,” it added.