The loan book of India's non-banking financial companies (NBFCs) is projected to grow by 15-17% in FY 2025-26, supported by GST rate cuts and better liquidity conditions, according to rating agency ICRA.
NBFCs reported a strong expansion of 17% in FY25 and 24% in FY24, and the latest GST reforms are expected to sustain the momentum.
GST Reforms and Credit Growth
The recent GST rate cuts are likely to boost consumer demand and improve credit appetite among borrowers. This will directly support banks and NBFCs in expanding their loan portfolios, ICRA noted.
However, growth has been uneven across segments. Stress in retail and MSME loans has constrained private sector banks and NBFCs in recent years. With economic activity expected to pick up after the tax cuts, lending to these segments may revive.
As of March 2025, loans to small businesses, unsecured personal loans, and consumption loans made up nearly 34% of NBFCs' total credit book of Rs 35 trillion.
Asset Quality Remains a Concern
Despite the positive outlook, ICRA has cautioned that asset quality risks remain. Lenders continue to face pressure in segments vulnerable to income shocks and demand weakness, particularly in industries such as textiles. Employees in these sectors may face difficulties in servicing loans like microfinance, home loans and personal credit.
ICRA also projected that the credit cost of NBFCs could rise by around 30 basis points in FY26 compared to last year, with the non-housing loan segments expected to feel the impact more sharply.
Margins Supported by Liquidity
While asset quality risks remain, NBFCs are expected to benefit from the declining cost of funds, which should help sustain their margins and overall earnings.
ICRA's Co-Group Head for financial sector ratings highlighted that GST-led demand revival will be a key driver of growth in FY26:
"The improvement in economic activity after GST rate cuts will support credit expansion, even as lenders remain cautious on asset quality."
Outlook
- Credit growth: 15-17% in FY26
- Loan book size: Rs 35 trillion as of March 2025
- Credit cost: Likely to increase by 30 bps year-on-year
- Positive factor: GST reforms and lower funding costs
- Risks: MSME stress, retail defaults, and global economic uncertainties
NBFCs, which have emerged as a critical channel of credit delivery in India, are now expected to play a larger role in financing small businesses and retail consumption, even as they navigate evolving economic and geopolitical risks.
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