India’s consumer finance non‑banking financial companies (NBFCs) have seen a period of rapid growth and regulatory change in recent years. The FY‑25 sector report from Northern Arc Capital Limited (NACL) provides a comprehensive look at how this segment has evolved, the performance of its portfolio, funding patterns and risks. This article presents the slide deck into an accessible narrative while preserving key data points, charts and maps from the original report. See the full deck here.
Key regulatory developments
The consumer finance landscape has been shaped by a series of regulatory interventions. Until FY22 the sector benefitted from technology‑led innovation; digitisation, seamless KYC, rich transaction data and COVID‑19‑accelerated digital adoption enabled fintech‑driven underwriting and widespread retail lending. Subsequent regulations have sought to address emerging risks:
1. Jun‑22 – Pre‑Paid Instrument Guidelines: The Reserve Bank of India (RBI) prohibited non‑banks and fintechs from loading credit lines on to prepaid payment instruments.
2. Sept‑22 – Digital Lending Guidelines: These clarified the roles and responsibilities of regulated entities, loan service providers and digital lending apps. Lenders were required to provide a key fact statement with all‑in cost expressed as annual percentage rates and disclose details such as recovery agents and grievance officers. The guidelines also effectively banned first‑loss default guarantees (FLDG), a ban that was later relaxed.
3. Default Loss Guarantee FAQs: RBI’s clarification limited implicit guarantees to 5 % of the underlying portfolio and made such guarantees non‑reinstatable after invocation.
4. Nov‑23 – Risk Weight Revision: Rapid growth in unsecured lending prompted the RBI to raise the risk weight on consumer credit exposures of non‑banks by 25 % to 125 % and credit card receivables of banks to 150 %.
5. Oct‑24 – Regulatory interventions: Enforcement actions against some unsecured lenders spurred lenders to revisit business models and underwriting practices.
6. May‑25 – Regulatory directives: NBFCs and banks must fully provision for all stressed loans sourced via loan service providers without offsetting any FLDG provided by fintechs.
These interventions reflect the regulator’s balancing act between fostering innovation and containing systemic risk.
Snapshot of Northern Arc’s NBFC partners (Mar‑25)
At the end of FY‑25, Northern Arc’s consumer finance NBFC partners collectively managed gross AUM of ₹75,151 crore, split between on‑book AUM of ₹28,790 crore and off‑book AUM of ₹46,361 crore. The network’s combined net worth was ₹13,490 crore and debt outstanding ₹21,748 crore. The portfolio’s average portfolio‑at‑risk beyond 30 days (PAR>30) was 6.1 %, PAR>90 was 3.4 % and current collection efficiency (CE) averaged 92.5 %.
The chart below summarises the partner landscape by tenor, size and credit rating. Short‑term lenders accounted for nine entities with AUM of roughly ₹23,280 crore, while long‑term lenders numbered eight with AUM of ₹51,871 crore. Seven entities had AUM above ₹2,000 crore, five entities were in the ₹500–2,000 crore range and five were below ₹500 crore. Rating‑wise, A and above entities held ₹26,895 crore across three partners, BBB and below accounted for ₹42,866 crore across eight partners and unrated entities held ₹5,391 crore.
Geographically, the portfolio was concentrated in a handful of states. The map shows that Maharashtra (13 %) and Karnataka (12 %) held the largest AUM shares, followed by Uttar Pradesh (10 %), Telangana (9 %), Tamil Nadu (9 %) and Gujarat (6 %). States like Delhi and West Bengal had smaller AUMs but higher delinquency rates, with PAR>30 around 8 % in March 2025 (see the state‑level section below).
Portfolio growth and disbursements
The consumer finance portfolio expanded rapidly over the FY22–FY25 period. As the top-left panel of the next figure shows, the AUM in the >₹2,000 crore category surged from around ₹16,651 crore in H1 FY22 to ₹68,153 crore by H2 FY25, implying a compound annual growth rate (CAGR) of roughly 38 %. In contrast, the <₹500 crore and ₹500–2,000 crore segments grew modestly. On a tenor basis, long‑term portfolios consistently dominated short‑term ones, growing from ₹2,532 crore in H1 FY22 to ₹51,871 crore in H2 FY25.
Disbursements followed a similar trajectory. Aggregate disbursements (bottom‑left) climbed from about ₹17,140 crore in H2 FY22 to ₹46,043 crore in H2 FY25, driven largely by the largest NBFCs. Short‑term disbursements grew steadily, while long‑term disbursements increased more sharply in FY24 but dipped slightly in H2 FY25. The right panels of the figure break the same data by tenor and reveal that long‑term lending has consistently made up the bulk of the portfolio.
Asset quality: delinquency and collection efficiency
Delinquency trends
Portfolio‑at‑risk (PAR) metrics provide insight into asset quality. For PAR>90, the pattern is similar. Small NBFCs saw an increase from 1.3 % (FY22) to 2.5 % (FY25), mid‑sized players averaged 2.9 % and large NBFCs remained around 2.5 %. When viewed by tenor, short‑term lenders had lower PAR>30 (rising from 3.1 % to 4.8 %) than long‑term lenders (hovering around 6 %), while PAR>90 remained below 2.7 % for both segments.
State‑level performance
Disaggregating the portfolio by state reveals both concentration and risk. As noted above, Maharashtra and Karnataka together accounted for roughly a quarter of the AUM. The left-hand map below shows each state’s share of total AUM (darker shades denote larger shares). The right‑hand map presents the state‑wise PAR>30 DPD as of March 2025; north‑eastern and some northern states exhibited higher delinquencies (>7 %) while southern states generally performed better.
The bar chart plots the March 2025 position‑outstanding (POS) by state alongside their PAR>30 and PAR>90 metrics. States with larger portfolios such as Maharashtra, Karnataka and Telangana had moderate PAR>30 levels (around 6 %, 4.4 % and 5.1 %, respectively), whereas Delhi and West Bengal displayed PAR>30 above 8 % and correspondingly higher PAR>90. This indicates that geographic concentration amplifies credit risk in certain markets.
Collection efficiency
Despite rising delinquency in some segments, current collection efficiency (CE) remained high. The monthly trend chart shows CE for three AUM buckets (<₹500 crore, ₹500–2,000 crore and >₹2,000 crore) and by tenor. Smaller NBFCs consistently achieved 95–97 % CE, while mid‑sized and large NBFCs maintained CE around 92 %. Short‑term lenders exhibited CE near 90 %, compared with 94–95 % for long‑term lenders. Even during slower months (Dec‑24), CE stayed above 90 %, underscoring borrowers’ willingness to repay.
Profitability and
return analysis
Short‑term vs long‑term
profitability
Profitability differs sharply between short‑term and long‑term lenders. The ROA “tree” in FY25 decomposes return on assets into net interest income, other income, employee cost, operating expenses, credit costs and profit before tax (PBT) (all expressed as a percentage of average gross loan portfolio). Short‑term lenders earned higher margins — net interest income of 16 %, other income 17 % — but also incurred higher operating expenses (11 %) and credit costs (12 %), resulting in a PBT margin of 7 %. Long‑term lenders generated lower net interest income (10 %) and other income (6 %), but their costs were correspondingly lower; their PBT margin was 2 %. This highlights the trade‑off between yield and risk in short‑tenor lending.
ROA by AUM category
When grouped by AUM, mid‑sized NBFCs showed the most volatile income and cost structure. In FY25, AUM 500–2,000 crore players earned net interest income of 12 % and a striking 34 % of their income came from fees and other revenue, but their credit costs were also highest at 24 % and operating expenses at 14 %, leaving a PBT margin of 8 %. Large NBFCs (>₹2,000 crore) had a more balanced mix: net interest income 10 %, other income 8 %, credit costs 6 % and PBT 4 %. Small NBFCs (<₹500 crore) generated net interest income of 12 % and other income 17 %, but high operating expenses (10 %) and credit costs (10 %) left them with a thin 1 % PBT margin.
Pre‑provision profit buffers and provisions
Pre‑provision operating profit (PPOP) relative to credit cost gauges a lender’s ability to absorb losses. Small NBFCs kept a PPOP/credit cost ratio of 0.9x by FY25, while large NBFCs were at 1.5x; mid‑sized NBFCs improved from negative coverage in FY22 to just below 1x in FY25. On a tenor basis, short‑term lenders increased PPOP/credit cost from 0.8x in FY22 to 1.4x in FY25; long‑term lenders peaked at 2.8x in FY23 before sliding to 1.6x. Loan loss provisions rose sharply for mid‑sized NBFCs — from 2.2 % of AUM in FY22 to 8.8 % in FY25. Short‑term lenders’ provisions oscillated around 6 %, while long‑term lenders increased provisioning to 4 % by FY25.
Leverage, funding cost and return on equity
Leverage (debt/net worth) decreased for small NBFCs — from 2.9x in FY22 to 2.5x in FY25, suggesting deleveraging or equity growth — and rose modestly for mid‑sized and large NBFCs to 1.5x and 1.6x, respectively. The cost of debt rose across the board: mid‑sized NBFCs saw the sharpest increase, from 13.6 % in FY23 to 16.5 % in FY25, while large NBFCs’ cost of debt climbed to 12.4 %.
Return on equity (ROE) displayed an interesting reversal. Small NBFCs recorded negative ROE through FY24. Mid‑sized NBFCs moved from negative ROE in FY22–FY23 to 17 % in FY24 and 18 % in FY25, while large NBFCs improved from -4 % to 12 %. By tenor, short‑term lenders delivered an ROE of 16 % in FY25 compared with 10 % for long‑term lenders. Equity raising peaked in FY23 when the cohort raised ₹4,508 crore across 16 entities, compared with ₹1,231 crore in FY22 and ₹1,212 crore in FY25.
Capital,
funding sources and instruments
Institutional equity and
ratings
The report lists major equity infusions into partner NBFCs since FY22 alongside rating movements. Several entities raised substantial capital in FY23 — one received ₹765 crore, another ₹1,250 crore, and yet another ₹609 crore. Rating trajectories varied: some issuers improved from BBB to A‑, others remained at BBB+, while a few ratings were withdrawn (WD).
Debt funding mix over time
Funding sources shifted significantly over the past three years. Between March 2023 and March 2025, the share of debt raised from banks increased from 17 % to 28 %, while the share from NBFC lenders rose to 40 %. In contrast, funding from development finance institutions (DFI) and offshore investors declined from 20 % to 14 %. Mutual funds, wealth funds and alternative investment funds (AIFs) supplied about 14 % of debt by FY25. The bottom panel of the next figure shows that term loans, which constituted 43 % of debt in March 2023, declined to 37 % by March 2025. Non‑convertible debentures (NCDs) (rose from 28 % to 35 %) and securitisation (from 3 % to 22 %).
Debt profile as of March 2025
The debt stock at the fiscal year‑end reveals where funding dependence lies. NBFC lenders accounted for 40 % of the ₹21,748 crore debt outstanding, banks provided 28 %, DFI/offshore investors and wealth funds/AIFs contributed 14 % each, and others supplied 4 %. In terms of instruments, term loans (37 %) and NCDs (35 %) still dominated, but securitisation had become a significant funding channel, representing 22 % of debt.
Funding patterns differed markedly by AUM size and credit rating. Smaller NBFCs (<₹500 crore) relied heavily on NBFC lenders, which provided 63 % of their debt, whereas larger entities (>₹2,000 crore) borrowed more evenly from banks (32 %) and NBFCs (38 %) with notable participation from offshore investors and AIFs. BBB‑rated and below entities sourced 58 % of their debt from NBFCs, while unrated entities were almost entirely dependent on NBFC lenders (77 %). Among instruments, higher‑rated issuers (A and above) enjoyed a diversified mix of term loans (39 %), NCDs (31 %), working capital lines (4 %) and securitisation (26 %), whereas unrated issuers raised 66 % through term loans and 32 % through NCDs, with negligible access to securitisation.
Glossary of terms
The report uses several banking and risk‑management metrics. Key definitions include:
1. AUM/GLP – Assets under management or Gross Loan Portfolio, representing outstanding principal on loans originated on‑book, securitised and off‑book.
2. Disbursement – Loans sanctioned and financed to borrowers during the period.
3. PAR 30 / PAR 90 – Portfolio‑at‑risk measures representing principal (plus interest and fees) overdue by more than 30 or 90 days.
4. Current Collection Efficiency (CE) – Current collections divided by current demand for the period; reflects the timeliness of borrower repayments.
5. NW – Net worth, i.e. equity share capital plus compulsory convertible instruments and reserves.
6. Free cash & liquid assets – Cash in hand and bank, money market instruments and marketable securities.
7. LLP – Loan loss provisions set aside against default losses.
8. ROA – Return on assets, defined as profit after tax divided by average AUM.
9. NII – Net interest income (total income from operations minus finance costs).
10. OER – Operating expense ratio (total expenses excluding finance costs, credit costs and taxes, as a percentage of GLP).
11. PPOP – Pre‑provision operating profit (income earned before deducting credit cost).
Conclusion
Northern Arc’s FY‑25 report on consumer finance NBFCs reveals a sector that has grown rapidly but is now confronting asset‑quality and funding‑cost pressures. Regulatory interventions have tightened oversight while digital adoption and data‑driven underwriting continue to drive growth. The portfolio is concentrated in a handful of states, and delinquencies remain manageable though rising in smaller and mid‑sized entities. Funding patterns are shifting toward NCDs and securitisation, and return metrics are improving as NBFCs scale and optimise operations. Overall, the sector remains resilient but will need to adapt to evolving regulations and market conditions.
Disclaimer
This article is based on Northern Arc’s FY-25 Consumer Finance NBFCs sector report. It is intended for informational purposes only and does not constitute investment advice or a recommendation.