India's retail-focused NBFCs to outgrow banks: analyst

Large NBFCs grew at a CAGR of 20% in FY2014-2019.

Indian non-bank financial companies (NBFC) that focus on retail are expected to outpace banks in the medium term as they continues to benefit from limited direct competition from the banks, funding demand from underserved customers, and loan books that are shorter term and more granular, according to a Fitch Ratings report.

India's NBFC sector rose in the five-year period FY2014-FY2019, with the large institutions expanding at a CAGR of 20%. These firms are said to have filled gaps in the market left by capital-constrained state banks and also kept the system-wide credit-to-GDP ratio from falling more significantly.

Large, retail-focused NBFCs that are dominant in a region or subsector often generate strong pricing power, supporting its profitability.

However, NBFCs, especially the wholesale and housing finance firms, are still projected to remain under pressure as tight liquidity and problems in India’s property-development market persist.

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As NBFCs are mostly wholesale funded, they would be exposed to tighter market conditions. Small- to medium-sized NBFCs and those with large, long-tenor construction-finance portfolios are said to have faced the most significant difficulties in refinancing debt over the past year.

“The impact on large retail lenders has been less pronounced, whilst their stronger assets-and-liabilities maturity profiles would, in any case, provide them with more leeway if they did lose access to the debt markets,” Fitch Ratings stated.