The Resilience of Non-Banking Finance Companies and Asset Reconstruction in India
March 26, 2025, 4:10 pm
In the bustling world of finance, non-banking finance companies (NBFCs) and asset reconstruction companies (ARCs) are like two ships navigating through a storm. Each has its own challenges and opportunities, yet both are charting courses toward growth and recovery. Recent reports reveal a significant divergence in the performance of NBFCs and ARCs, highlighting the evolving landscape of consumer credit and asset recovery in India.
NBFCs are on a roll. Their personal loan segment surged by 37% in the third quarter of FY25, a stark contrast to the 16% growth seen across the broader financial system, which includes banks. This growth is not just a blip; it’s a trend. Over the past few years, NBFCs have seen their unsecured loans grow 2.6 times, compared to 1.8 times for the overall system. They are gaining market share, now holding 24% of the personal loan portfolio, up from 22% in FY24 and 17% in FY22.
The Reserve Bank of India (RBI) plays a crucial role in this narrative. In November 2023, the RBI increased risk weights on unsecured consumer credit exposures, a move that initially seemed to tighten the noose on NBFCs. However, recent adjustments have restored these risk weights to previous levels, allowing banks to lend more freely to NBFCs. This regulatory shift is like a breath of fresh air, enabling NBFCs to offer loans at lower interest rates.
Industry experts suggest that the combination of rate cuts and liquidity infusion by the RBI will lower borrowing costs for NBFCs. This means they can price loans more competitively. With an improving borrower profile and a more disciplined lending approach, the unsecured segment is poised for better risk-adjusted growth. The winds of change are blowing favorably for NBFCs.
However, the landscape is not without its challenges. The average disbursement ticket size for personal loans has shrunk, indicating a shift towards smaller loans. In the first half of FY24, the average ticket size for NBFCs was just ₹25,000, compared to ₹58,000 for the overall system. This shift reflects a growing trend of smaller loans, with 84% of disbursements in volume terms being less than ₹50,000. It’s a reminder that while growth is robust, it’s also evolving.
On the other side of the financial spectrum, ARCs are also experiencing a transformation. According to Crisil Ratings, the cumulative redemption rate of security receipts (SRs) for stressed retail assets is expected to improve to 69-71% in FY26, up from an estimated 65% in FY25. This increase is driven by healthy recoveries from low-vintage accounts and improved settlement rates across both secured and unsecured asset classes.
The rise in redemption rates is a beacon of hope for ARCs. They are seeing better recoveries from borrowers classified as Special Mention Accounts (SMA), which have increased from 5% in FY23 to 25% in FY24. These borrowers are more accessible and less operationally intensive to collect from, leading to higher recovery rates. For secured loans, the underlying asset coverage is improving, which encourages borrowers to settle their debts.
However, not all segments are thriving equally. The microfinance sector, in particular, is facing headwinds. The expected growth in the cumulative redemption rate for microfinance has been revised downwards due to over-leveraged borrowers. This highlights the fragility within certain segments of the financial ecosystem.
Regulatory changes are also shaping the future of ARCs. The RBI has allowed ARCs to create board-approved policies for settling dues, streamlining the process for small-ticket loans. This flexibility is expected to speed up approvals and improve recovery rates, particularly for loans under ₹1 crore, which constitute a significant portion of the rated retail SRs.
As ARCs diversify into the retail segment, their adaptability to changing regulations will be crucial. The financial landscape is dynamic, and those who can pivot quickly will thrive. The regulatory environment is tightening, but it also offers opportunities for innovation and efficiency.
In conclusion, the financial sector in India is witnessing a remarkable transformation. NBFCs are riding a wave of growth, bolstered by favorable regulatory changes and a shift towards smaller loans. Meanwhile, ARCs are improving their redemption rates, driven by better recoveries and regulatory support. Both entities are navigating their respective challenges, but the overall outlook is one of resilience and adaptation. As they continue to evolve, the interplay between these two sectors will shape the future of consumer credit and asset recovery in India. The storm may be fierce, but these ships are sailing forward, undeterred.
NBFCs are on a roll. Their personal loan segment surged by 37% in the third quarter of FY25, a stark contrast to the 16% growth seen across the broader financial system, which includes banks. This growth is not just a blip; it’s a trend. Over the past few years, NBFCs have seen their unsecured loans grow 2.6 times, compared to 1.8 times for the overall system. They are gaining market share, now holding 24% of the personal loan portfolio, up from 22% in FY24 and 17% in FY22.
The Reserve Bank of India (RBI) plays a crucial role in this narrative. In November 2023, the RBI increased risk weights on unsecured consumer credit exposures, a move that initially seemed to tighten the noose on NBFCs. However, recent adjustments have restored these risk weights to previous levels, allowing banks to lend more freely to NBFCs. This regulatory shift is like a breath of fresh air, enabling NBFCs to offer loans at lower interest rates.
Industry experts suggest that the combination of rate cuts and liquidity infusion by the RBI will lower borrowing costs for NBFCs. This means they can price loans more competitively. With an improving borrower profile and a more disciplined lending approach, the unsecured segment is poised for better risk-adjusted growth. The winds of change are blowing favorably for NBFCs.
However, the landscape is not without its challenges. The average disbursement ticket size for personal loans has shrunk, indicating a shift towards smaller loans. In the first half of FY24, the average ticket size for NBFCs was just ₹25,000, compared to ₹58,000 for the overall system. This shift reflects a growing trend of smaller loans, with 84% of disbursements in volume terms being less than ₹50,000. It’s a reminder that while growth is robust, it’s also evolving.
On the other side of the financial spectrum, ARCs are also experiencing a transformation. According to Crisil Ratings, the cumulative redemption rate of security receipts (SRs) for stressed retail assets is expected to improve to 69-71% in FY26, up from an estimated 65% in FY25. This increase is driven by healthy recoveries from low-vintage accounts and improved settlement rates across both secured and unsecured asset classes.
The rise in redemption rates is a beacon of hope for ARCs. They are seeing better recoveries from borrowers classified as Special Mention Accounts (SMA), which have increased from 5% in FY23 to 25% in FY24. These borrowers are more accessible and less operationally intensive to collect from, leading to higher recovery rates. For secured loans, the underlying asset coverage is improving, which encourages borrowers to settle their debts.
However, not all segments are thriving equally. The microfinance sector, in particular, is facing headwinds. The expected growth in the cumulative redemption rate for microfinance has been revised downwards due to over-leveraged borrowers. This highlights the fragility within certain segments of the financial ecosystem.
Regulatory changes are also shaping the future of ARCs. The RBI has allowed ARCs to create board-approved policies for settling dues, streamlining the process for small-ticket loans. This flexibility is expected to speed up approvals and improve recovery rates, particularly for loans under ₹1 crore, which constitute a significant portion of the rated retail SRs.
As ARCs diversify into the retail segment, their adaptability to changing regulations will be crucial. The financial landscape is dynamic, and those who can pivot quickly will thrive. The regulatory environment is tightening, but it also offers opportunities for innovation and efficiency.
In conclusion, the financial sector in India is witnessing a remarkable transformation. NBFCs are riding a wave of growth, bolstered by favorable regulatory changes and a shift towards smaller loans. Meanwhile, ARCs are improving their redemption rates, driven by better recoveries and regulatory support. Both entities are navigating their respective challenges, but the overall outlook is one of resilience and adaptation. As they continue to evolve, the interplay between these two sectors will shape the future of consumer credit and asset recovery in India. The storm may be fierce, but these ships are sailing forward, undeterred.