NBFCs Poised To Manage Loan Default Risks? Moody's Eyes Positive Outlook— Here's Why

Moody's expects that non-banking financial companies will be able to manage the risk arising from an increase in retail loan delinquencies with enough loan-loss buffer. Strong macroeconomic conditions and benign monetary policy will also support NBFCs weather potential challenges.

In recent years, retail loans have increased rapidly, which will eventually lead to non-performing loans. Loan disbursements have outpaced India's nominal GDP rate. Moody's expect non-banking financial institutions' non-performing ratio for retail loans will continue to rise in the current financial year.

India reported 8.8% nominal GDP growth rate in the first quarter of the financial year 2026. Delinquencies of vehicle loans will likely increase, according to the rating agency. Vehicle loans at NBFCs have grown at a slower pace than other types of retail loans, the rating agency said.

The latest GST reform could spur demand for vehicle loans but it might also increase asset risks as collateral values can decline. Vehicle utilisation will likely decrease due to increased supply and potentially hurting cash flow for borrowers, Moody's said.

The quality of vehicle loans is not likely to deteriorate sharply because of the strong economic conditions, the rating agency said. The degree of deterioration in the quality of consumer loans will vary depending on the strength of each lender's underwriting standards and collection infrastructure.

"NBFIs focusing on lending to prime borrowers with strong underwriting standards will maintain their asset quality at current levels," the rating agency said. NBFIs targeting subprime borrowers will likely face greater asset risks as their debt will increase with limited repayment capacity, Moody's said.

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The Reserve Bank of India has introduced measures to curb growth in retail loans in the financial year 2024, which helped in mitigating risks. The central bank has also taken more action for the whole NBFI sector as well as company-specific supervisory measures.

Following central bank's measures, growth in unsecured loans has moderated, and diversified NBFIs have strategically pivoted toward secured products, the rating agency said.

"We estimate that retail loans at NBFIs will grow 15%–18% in fiscal 2025–26, compared to 18.3% in the prior year," Moody's said.

Levels of net charge-offs at NBFI have been stable in past few years. Effective collection operations and recoveries helped keeping charge-offs in check. Meanwhile, highly collaterlised asset classes such as gold loans, net charge-offs at rated NBFCs remained less than 0.6%, according to rating agency,

Most rated NBFIs have enough buffers to absorb potential loan losses, it in the form of capitalisation or loan-loss reserves, Moody's said.