Reflecting the cumulative impact of the Reserve Bank of India’s actions, the loan growth of rated finance companies in India will moderate to 18 per cent in the current financial year (FY25) from 20 per cent in FY24, according to S&P Global Ratings.
Geeta Chugh, credit analyst, S&P Global Ratings, said in a statement, “We anticipate recent actions by the Reserve Bank of India (RBI) will curtail lenders’ over-exuberance, enhance compliance, and safeguard customers.”
The RBI’s decision to raise risk weights on unsecured personal loans and loans to finance companies is specifically aimed at constraining growth and reducing interconnectedness between banks and finance companies, according to the S&P report “Indian Fincos’ Balancing Act”.
Finance companies will sustain loan growth stronger than the banking sector, which is expected to grow at 14 per cent. The finance companies’ loan book is unseasoned, and strong economic growth has supported retail repayment capacity. “We see the strength in retail lending as a competitive edge, with finance companies dominating in some retail products,” Chugh said.
Generally, upper-layer finance companies have strong capital levels, which will support credit growth over the next two years and provide downside buffers. Retail loans by banks and finance companies in India could triple by 2030, driving household leverage to 34 per cent by FY31 from about 23 per cent by the end of 2024.
S&P Global Ratings said Indian lenders’ strong underwriting will support asset quality. This is reflected in their focus on lending primarily to low-risk customers and generally low loan approval rates.
Funding for finance companies remains sensitive to confidence levels, but companies with strong parentage have better access to competitive rates. Emerging co-lending models are easing funding pressure, it added.
First Published: Sep 24 2024 | 5:05 PM IST
