In recent years, Non-Banking Financial Companies (NBFCs) have experienced a significant increase in the total credit they extend, spanning across sectors such as agriculture, industry, services, and retail loans. Despite this overall growth, the share of credit directed towards industry has declined, falling from 40.6% in FY19 to 36.1% in the first half of FY24. A similar trend is observed in the services sector, where the credit share has reduced from 17.9% in FY19 to 14.6% in first half of FY24.
Source: RBI Financial Stability Reports
On the other hand, retail loans have shown an upward trend, with their share rising from 26.1% in FY19 to 31.8%in the first half of FY24. The growth trend became evident in FY22 and FY23, with retail loan values showing a significant rise—growing from 27.40% in FY22 to 31.20% in FY23. This growth indicates the importance of retail loans in NBFCs' credit allocation, making it the second largest segment after industry. NBFCs offer various retail loans, including personal loans, education loans, auto loans, and consumer durable loans. Among these, auto loans and consumer durable loans are experiencing the fastest growth.
Factors Driving the Increase in Credit Allocation to Retail Loans
Increased demand from the unorganized and underdeveloped economy: A significant portion of NBFC customers comes from the unorganized sector, where there is a growing preference for retail loans, such as home, personal, and vehicle loans, to meet their financial needs.
Customized loan products: NBFCs are providing loans that satisfy specific needs like personal loans, automobile loans, and consumer durable loans, which have resulted in attracting more customers.
Technological Advancement: The adoption of digital platforms and fintech innovations by NBFCs has made the loan application and approval process more efficient and accessible, encouraging more consumers to opt for retail loans.
Fast Disbursement: After retail loan approval, the funds are quickly transferred to the borrower's account, ensuring minimal waiting time.
In conclusion, the recent upward trend in credit allocation by NBFCs, particularly towards retail loans, reflects shifting market trends and consumer behavior. While sectors like industry and services have seen a gradual decline in overall credit share, retail loans have surged, driven by increased demand from unorganized sector, and technological advancements. As a result, retail loans now hold a prominent position in NBFCs' credit distribution, highlighting the evolving priorities within the financial sector.
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