Non-banking financial Companies (NBFCs) have been a significant part of India’s financial ecosystem, offering loans, credit, and other financial products to individuals and businesses.
However, rising borrowing costs pose significant challenges, especially for new-age NBFCs. Often relying on digital platforms and innovative models, these companies feel the heat as profits take a hit. According to regulatory filings, NBFCs experienced a decline in net profits between the September quarters of 2023 and 2024, with a few managing to maintain flat earnings or show modest growth.
The Digital Lenders’ Association of India observed that fintechs providing unsecured consumer loans have recently changed due to regulatory guidance on loan duration, pricing, and handling customer complaints.
Let’s explore what’s happening and why this is important.
Financial Performance of Key NBFCs
| NFBC | Financial Performance |
| KreditBee | Net Profit Decline: Bengaluru-based KreditBee reported a 20% drop in net profit, down to ₹20.7 crore for the quarter ended September 30, compared to ₹25 crore a year ago. Revenue Growth: Operational revenue rose by 73% to ₹518 crore. Soaring Expenses: Expenses increased by 84%, primarily due to higher borrowing costs and impairments on financial instruments. |
| Pune-based Fibe | Stable Net Profit: Fibe recorded a net profit of ₹12.4 crore, unchanged from the previous year. Revenue Growth: Operational revenue increased by 56% to ₹252 crore. Expense Surge: Total expenses grew by 63%, reaching ₹235 crore. |
| Lendingkart | Net Loss: Ahmedabad-based Lendingkart posted a net loss of ₹65.6 crore, a sharp reversal from a net profit of ₹29 crore a year earlier. |
| Kinara Capital | Fiscal H1 Loss: Bengaluru-based Kinara Capital reported a net loss of ₹32 crore in the first half of FY25, compared to a profit of ₹8 crore during the same period last year. |
| Paisalo Digital | Modest Gains: New Delhi-based Paisalo Digital recorded a net profit of ₹49.5 crore in Q2 FY25, up from ₹47 crore a year ago. |
| Ugro Capital | Profit Increase: Ugro Capital’s net profit rose by 21%, reaching ₹35 crore in Q2 FY25, compared to ₹28.8 crore in the same period last year. Strategic Focus: The company prioritizes profitability over aggressive disbursement growth, adhering strictly to RBI guidelines. |
Industry-Wide Borrowing Cost Analysis
Fintech companies catering to the riskiest segments of the consumer market have faced significant increases in borrowing costs. According to industry experts, the rise ranges between 125 and 300 basis points, depending on the scale of operations.
Cost Increase by NBFC Tier
- Base Layer NBFCs: Borrowing costs have increased by over 200 basis points.
- Middle Layer NBFCs: Costs have risen by 50-80 basis points.
- Largest NBFCs: Borrowing cost increases capped at 50 basis points.
Source: Economic Times
The Rising Cost of NBFC Borrowing: What’s the Story?
Borrowing costs are the interest rates NBFCs pay when they take loans or raise funds from banks, financial markets, or other institutions. Over the past year, these costs have been climbing due to higher policy rates set by the Reserve Bank of India (RBI) and global financial conditions.
Managing higher borrowing costs is tough but manageable for traditional NBFCs, which already have established customer bases and significant assets. However, new-age NBFCs—those using digital platforms, fintech solutions, and non-traditional methods—are under immense pressure. Their business models, often centered on quick growth, rely heavily on external funding.
Why Are New-Age NBFCs Feeling the Strain?
Dependence on Debt
Unlike traditional financial institutions that can use customer deposits as funding sources, NBFCs rely on borrowing. With rising interest rates, the cost of these loans has surged, directly impacting their profitability.
Lower Margins
Many new-age NBFCs operate in niche markets, offering small-ticket loans or catering to underserved segments. While this allows them to grow quickly, it also means thinner profit margins and higher borrowing costs, which further shrink these margins.
Competition in Digital Lending
With several players entering the digital lending space, pricing pressure is high. New-age NBFCs often offer competitive interest rates to attract customers. However, they find it hard to pass on the higher borrowing costs to customers without losing market share.
The Profitability Challenge
Profitability is becoming a major concern for new-age NBFCs. As borrowing costs eat into profits, many companies struggle to show significant returns. Investors, who were initially excited by the growth potential of digital lenders, are now demanding sustainable profits.
Some NBFCs resort to cost-cutting measures, like reducing marketing expenses or focusing on high-yield segments. However, these measures come with risks. For instance, cutting back on customer acquisition could slow growth, while focusing solely on high-yield segments might increase default risks.
Balancing Growth and Profitability
New-age NBFCs face the tough task of maintaining growth while controlling costs. Their business models, which prioritize customer speed and convenience, often require significant spending on technology, data analytics, and customer acquisition.
To make matters worse, regulatory changes and compliance requirements add another layer of costs. For example, stricter know-your-customer (KYC) norms and data privacy regulations mean additional investments in systems and processes.
Shift Away from Risky Borrowers Raises Concerns
Industry experts highlighted that some borrowers might revert to informal financing channels as digital lending platforms scale back and stop serving high-risk borrower segments.
What Does This Mean for Customers?
For borrowers, rising NBFC borrowing costs could mean slightly higher interest rates or stricter eligibility criteria. While some customers might find it harder to get loans, others might benefit from innovative loan products as NBFCs try to stay competitive.
Customers should stay informed about loan terms and conditions and compare options before committing. With digital platforms offering easy access to loan comparisons, this has become more straightforward than ever.
A Broader Impact on the Economy
The struggles of new-age NBFCs could have ripple effects on India’s economy. NBFCs play a crucial role in lending to micro, small, and medium enterprises (MSMEs), which are the backbone of the economy. If NBFCs pull back on lending due to profitability concerns, it could slow economic growth.
Moreover, a dip in investor confidence in digital NBFCs could impact the entire fintech ecosystem, potentially slowing down innovation in financial services.
The Role of Regulation
The RBI has been proactive in ensuring the stability of the NBFC sector. However, balancing regulation with innovation remains a challenge.
For example, stricter norms help reduce risks but can also increase operational costs for new-age NBFCs. A collaborative approach, where regulators and NBFCs work together, is essential to address these challenges without stifling growth.
Strategies to Navigate the Crisis
Despite these challenges, there are ways for new-age NBFCs to adapt and thrive. Let’s look at a few strategies they could adopt:
Diversify Funding Sources
Relying solely on bank loans or market borrowing isn’t sustainable. To reduce their dependency on high-cost debt, new-age NBFCs could explore partnerships, securitization, or equity financing.
- Focus on Operational Efficiency
Automating processes, using advanced analytics for credit assessment, and cutting unnecessary overheads can help reduce costs without sacrificing customer experience. - Target High-Quality Borrowers
Shifting focus to customers with better credit profiles can reduce default risks and improve profitability. While this might slow down customer acquisition, it ensures more stable returns. - Innovate Loan Products
Offering flexible repayment options, loyalty rewards, or value-added services can help attract and retain customers without aggressive pricing.
A Path Forward for New-Age NBFCs
Higher borrowing costs are undeniably a significant challenge for new-age NBFCs. However, these companies can navigate the crisis with the right strategies and emerge stronger. Diversifying funding sources, improving operational efficiency, and innovating products are critical steps in this journey.
At the same time, customers and regulators have roles to play in supporting a healthy and sustainable NBFC ecosystem. Customers should make informed choices, while regulators must ensure a balanced approach to fostering innovation and stability.
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FAQs
Why are New-Age NBFCs facing a decline in profits?
New-age NBFCs are facing a decline in profits primarily due to the rising cost of borrowing. As interest rates increase, the cost of funds for these NBFCs rises, squeezing their profit margins.
How does the rise in interest rates impact NBFCs?
When interest rates rise, NBFCs have to pay more to borrow money. This increased cost of borrowing reduces their profitability, especially when they have fixed-rate loans or assets.
What are the challenges faced by New-Age NBFCs?
New-age NBFCs face increased funding costs, asset quality concerns, and competition from traditional banks. They also need to adapt to changing regulatory norms and economic conditions.
How can New-Age NBFCs mitigate these challenges?
To mitigate these challenges, New-Age NBFCs can focus on diversifying their funding sources, improving asset quality, and optimizing their cost structure. They can also explore new business models and digital technologies to enhance efficiency and customer experience.
I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.
