S&P Global Ratings expects its ratings in the global nonbank financial institution sector to remain relatively stable in 2025, though some issuers' profitability will be tested amid high economic uncertainty and likely bouts of volatility. Challenges such as U.S. tariffs could affect global economic performance, supply chains, and credit conditions and in turn present stumbling blocks for nonbank financial institutions (NBFIs).

Risks will be most pronounced for issuers that rely heavily on short-term funding or that have long-term funding due to mature within the next 12 months. NBFIs still rely on unsecured bond markets to generate stable funding, and bouts of volatility could destabilize capital bases quickly.

Many finance companies (fincos) in 2024 repriced their asset bases, secured funding, and built liquidity, which should support their creditworthiness this year. However, fincos with unstable operating revenue, amid elevated interest rates in some jurisdictions, could face inflexible business models and potential ratings instability.

Moreover, in a severe case, extremely weak asset quality would destabilize committed funding as covenants come under pressure. Investor confidence could diminish in an extreme downside case where asset quality deteriorates sharply, undermining funding sources and market liquidity.

Even so, 89% of our ratings on global fincos have stable outlooks, and the average rating is 'BBB-'. Furthermore, rating actions were relatively contained in 2024 and tended to be idiosyncratic.

Tariffs Could Complicate Conditions

U.S. trade policy could complicate credit conditions for some fincos around the globe. The Trump administration has moved quickly to impose new tariffs on goods imported from several countries. In S&P Global Ratings economists' view, the U.S. tariffs and trading partners' countertariffs will lead to across-the-board lower GDP growth, higher unemployment rates, and higher inflation. These effects will be larger for smaller and relatively trade-dependent economies.  

Higher tariffs could also reignite inflation and slow--or reverse--the descent in policy interest rates, potentially causing uncertainty around fincos' growth opportunities, straining asset quality, and raising funding costs.

Consistent Funding Is Essential

The consistency of funding through the cycle is essential to the industry's ratings stability, given its funding is largely from wholesale sources. A rapid worsening in funding and liquidity conditions remains the greatest risk for the sector.

As interest rates have declined from their peak, coupled with tightening credit spreads and increasing investor risk appetite, NBFIs in some jurisdictions have been able to diversify their funding mix by accessing the unsecured market.

For 2025, although the exact pace and extent of rate cuts remain uncertain, we anticipate interest rates will remain higher than historical levels. Still-high rates in some jurisdictions will likely limit many NBFIs' access to funding, mainly secured debt issuances, as market volatility bubbles below the surface. Nonetheless, the continued descent in interest rates could release pressure on funding costs and help some fincos take advantage of business opportunities.

Fincos' reliance on confidence-sensitive funding already constrains ratings in the sector. But the sector's resilient performance in 2024 proved many fincos have developed versatile and robust funding franchises. That resilience will be tested again this year with periods of heightened volatility and ongoing economic uncertainty, which could chisel away at ratings stability.

Funding and liquidity stability could collapse quickly if economic shocks spill into the real economy and weaken investor confidence. Fincos most at risk include those that rely on short-term wholesale funding to create balance-sheet leverage. Models like this can leave fincos beholden to short-term market stability, especially where management teams are willing to create a degree of maturity mismatch.

But even if funding is well matched by assets, fincos that lack backup facilities to address short-term funding maturities will often rely on a run-off period to meet short-term needs in the event of market stress. Run-off scenarios like this can raise questions about medium-term ratings stability.

The other fincos most at risk are those that face material near-term maturities of long-term funding. We expect management teams will address these maturities in advance, because refinancing delays would narrow the window in which fincos can address their balance-sheet funding needs. A steady increase in near-term maturities without credible plans to address them would likely impair credit quality.

Profitability Will Be Tested

Profitability will be tested in 2025 amid economic challenges, inflation, and higher-for-longer rates that could affect business growth expectations. Fincos that can gradually stabilize net interest margins (NIMs), maintain asset quality, and control their operating expenses will have steadier profitability this year.

Some industry segments have been able to reprice their assets quickly to compensate for high NIMs, while others are repricing more slowly. Changes in rates and credit spreads will be key determinants of funding costs and NIMs for NBFIs. Investment-grade companies have maintained strong access to debt markets, while a tightening in credit spreads has aided many speculative-grade fincos' access to these markets as well.

We expect asset quality pressures to remain manageable for fincos. Asset quality is gradually recovering as some fincos are deploying capital amid enhanced underwriting and cleaning older vintages on their balance sheets. Furthermore, given the economic uncertainties because of changes in foreign trade policies, low single-name concentrations and limited risk appetite could mitigate asset quality pressures.

Pockets of risk could persist for fincos that focus on commercial real estate (CRE) and small and midsize enterprise (SME) loans. We anticipate underlying asset quality risk to manifest for CRE companies in real estate owned and for fincos exposed to SMEs in unrealized and realized losses, nonaccruals, and amended payment in kind. In our base case, we don't foresee any significant downturn in these markets this year.

And while some global fincos have been able to control their operating expenses to cope with lower NIMs, many have maintained business growth and are looking to invest in their platforms rather than retreat.

Appendix: Country Anchors

The anchor is the starting point of our rating analysis for banks and fincos (see table). We base it on our Banking Industry Country Risk Assessment (BICRA). BICRAs evaluate and compare the relative strength of different banking systems and highlight the economic and industry risks associated with a country's financial system on a scale from 1 (lowest risk) to 10 (highest risk).

Australia

Our anchor for nonbank financial lenders in Australia remains 'bbb-', three notches below that for banks. The three notches reflect our view of the incrementally higher industry risk for fincos in Australia relative to banks. Funding risk for fincos is also higher than for banks, in our view, because they typically lack central bank access.  

Australia has a wealthy, open, and resilient economy that has performed relatively well following economic downcycles and external shocks. Low unemployment over the next two years should keep credit losses close to prepandemic levels. Nevertheless, banks in Australia remain exposed to a potential jump in credit losses due to high household debt, elevated interest rates and prices, and global economic uncertainties. We expect the persistent gap between housing demand and supply will propel modest growth in property prices in the next two years. 

We consider Australia's prudential regulatory standards and supervision to be among the strongest globally. An oligopolistic industry structure supports system stability. Sound earnings and solid interest margins should protect the banking system from unforeseen events, including a significant rise in credit losses. A material dependence on external borrowing exposes Australian banks to funding disruptions.

Azerbaijan

Our 'b' anchor for fincos in Azerbaijan is two notches below the 'bb-' anchor for banks. We believe fincos in Azerbaijan face incrementally higher industry risk than banks because they are more dependent on market-sensitive funding, owing to their lack of access to central bank funding. In addition, they operate under weaker regulatory oversight and a weaker institutional framework, with higher competitive risk and typically less stable revenue through economic cycles. 

Brazil

Our anchor for fincos in Brazil is 'bb', just one notch below the 'bb+' anchor for commercial banks operating only in Brazil, given the central bank of Brazil and National Monetary Council closely regulate all financial entities in the country, including nonbanks.

In addition, these entities have access to central bank funding and can issue deposits guaranteed by the Credit Guarantee Fund (FGC). FGC is a private institution, owned by financial entities, responsible for the protection of accountholders and investors against financial institutions in case of intervention, liquidation, or bankruptcy. Finally, fincos in Brazil also have to comply with Basel III standards for regulatory capital ratios.

Canada

Our anchor for fincos in Canada is 'bbb-', while our anchor for banks operating mainly in Canada is 'a-', based on an economic risk score of '3' and an industry risk score of '2'. We view the trend for Canada's economic risks as stable. 

Canada's unified federal regulatory structure and superior track record in bank supervision position the industry favorably compared with global peers. We believe the country's banking industry structure supports stability; a small number of strong, complex, and well-diversified financial institutions dominate the sector. We continue to monitor the extent to which macroprudential measures might push risk into sectors that federal authorities do not regulate (such as residential mortgage lending by financial institutions that do not take deposits). 

Fincos in Canada have moderately higher funding risk than banks due to their lack of central bank access and higher use of wholesale funding. They also face higher competitive risks than banks in Canada, without substantial barriers to entry to offset the increased competition. Despite some federal regulations as well as provincial laws, Canadian fincos face less prudential regulation than banks in Canada, resulting in moderately increased risks relative to banks. This results in a three-notch adjustment to arrive at the 'bbb-' anchor. 

Chile

The anchor for Chile-based fincos is 'bb+', reflecting the standard three notches below the bank anchor. Fincos in Chile do not have central bank access and rely mostly on wholesale funding. Although fincos that issue market debt are regulated by the Financial Market Commission (CMF) and are required to report their financial statements following international standards on a quarterly basis, we do not believe they have the same prudential standards as banks.

We also believe fincos face strong competition from banks and among themselves, with low barriers to entry. In addition, fincos' higher funding costs compared with banks limit their competitiveness in the financial industry and profitability.

China

The anchor for fincos operating in China is 'bb-', two notches below that for banks. We believe fincos operating in China face higher risks than banks. These risks include the lack of access to the central bank, significant reliance on wholesale funding, fierce competition, and less comprehensive prudential supervision and regulation for many. 

Fincos are not subject to pricing controls and face less market distortion from state ownership than banks. However, these companies are more susceptible to business cycles, leading to more volatile revenue. Compared with banks, fincos also generally have higher financing costs.

Some fincos, such as leasing and microfinance firms, may continue to show subdued growth prospects because of the regulatory changes in those subsectors and an uneven economic recovery in China. Authorities' ongoing sector reform will drive sector consolidation, weed out weak players, and shut down a significant number of dormant companies. The heightened scrutiny of leasing companies will improve their governance and risk management capacity and limit risk-taking activities to support system stability over the next five years.  

We expect China's rate cut cycle, price competition, and asset quality pressure are likely to weigh on fincos' profitability. Despite supportive policies, weak demand may increase price competition in some finco sectors. Meanwhile, provision costs will likely remain high as companies resolve the asset quality risks from local government financing vehicles, especially for regional players with customer or geographic concentrations.

Chinese asset management companies (AMCs)

We see AMCs in China as a specialized part of the finco sector. Our anchor for our ratings on AMCs in China is 'bb-', two notches below the anchor for banks operating in the country. This mainly reflects AMCs' typical lack of access to central bank funding, significant reliance on wholesale funding, and lower regulatory oversight. 

Regulatory barriers to entry ensure that AMCs face lower competitive risks than fincos. In China, only licensed AMCs can acquire nonperforming assets from financial institutions in the primary market. So far, five national AMCs and 59 local AMCs have received licenses in China. We do not anticipate a rapid increase in the number of licenses over the next two years. 

The rated national AMCs--China Orient, China CITIC Financial Asset Management Co. Ltd., and China Cinda Asset Management Co. Ltd.--benefit from one-notch positive entity-specific adjustments to their anchors. This reflects stricter prudential regulatory oversight for the national AMCs than for other AMCs. Over the years, regulations on national AMCs have strengthened, especially in capital and leverage requirements and risk management frameworks. 

Finland

The 'bbb-' anchor for fincos is three notches below that for banks. We believe the main risk for fincos is their inherent industry risk. Fincos do not have central bank access, which limits financial flexibility, particularly in times of stress. Moreover, they face strong competition from deposit-taking banks. Given their concentration in a few business lines, their revenue can also be more volatile.

In addition, fincos are generally not regulated and do not benefit from regulatory oversight, although the Finnish Financial Supervisory Agency (FSA) has supervised some since July 2023. However, the FSA primarily focuses on qualitative risk factors of fincos and does not request minimum capital or liquidity requirements.

India

Our starting point for rating fincos in the middle and base layers in India is 'bb', which is two notches below the anchor for the country's banking sector. Our starting point for rating upper-layer fincos in India is 'bb+', which is one notch below the anchor for the country's banking sector.

Fincos are exposed to economic risk in India. We also believe Indian fincos face greater industry risk than banks because they generally have no access to central bank funding. The sector remains subject to less onerous regulations than banks, in our view, notwithstanding some requirements on capital adequacy, liquidity, and asset quality management. That said, regulations for fincos are tightening.

The upper-layer fincos are subject to more stringent regulations and supervision than those smaller players face. The tougher rules include capital adequacy norms, mandatory listing and consequent disclosure requirements, and more stringent provisioning needs. The scale-based regulations have progressively strengthened the financial system's stability, in our view. This has led to more sustainable growth at the largest fincos, along with a focus on risk management, transparency, and compliance.

Several fincos in India have created strong niches, domain expertise, and economies of scale to support revenue stability and mitigate competitive pressure. Despite having higher funding costs than banks, many of the larger fincos are very profitable, with overall returns on assets of 1.5%-3.0% over the past three years. Their earnings benefit from lower operating costs than banks', strong niche positions, and an absence of regulatory drag on margins.

Many fincos also benefit from strong parentage, leading to better funding access and at a competitive price. On the other hand, risk premiums for weaker fincos (or those with perceived governance issues) have risen. We anticipate such polarization will persist in 2025. Stronger fincos are likely to gain market share and continue to benefit from differentiated funding access. In our view, these companies will find their differentiated business niches, with weaker companies resorting to originate-and-distribute business models.

We expect the Indian financial sector's asset quality to continue to improve. Economic growth prospects are good, which should restrain imbalances over the next two years. We expect credit losses to normalize from decade lows. Unsecured personal loans have grown rapidly and could contribute to incrementally higher nonperforming loans. Nevertheless, we believe underwriting standards for retail loans in India are healthy, and delinquencies in this segment will remain manageable.

Japan

Our anchor for fincos operating predominantly in Japan is 'bbb-', two notches below our anchor for banks in Japan.

The narrower-than-standard gap in Japan reflects the finco sector's positive characteristics, including its funding stability, given Japanese fincos are typically subsidiaries of large corporate or banking groups. Another characteristic is revenue stability, which is not materially worse than that of the banking sector and therefore does not warrant the standard three-notch gap.

Kazakhstan

The finco anchor in Kazakhstan is 'b+', two notches below the 'bb' anchor for banks.

The lower anchor relative to banks reflects fincos' lack of central bank access, lower regulatory oversight, and higher competitive risk. It also reflects the industry dynamics for fincos operating in the country. Fincos in Kazakhstan are subject to certain leverage and capital adequacy ratios, along with some degree of oversight from the Agency for Regulation and Development of the Financial Market, which we believe provides some degree of protection for creditors.

In addition, although domestic banks also face heightened competitive risks, we believe fincos face incrementally stronger competition, due in part to more limited funding options to finance their business model. 

Korea

The 'bbb-' anchor for fincos operating in Korea is two notches below the bank anchor for Korea. We believe fincos in Korea face incrementally higher industry risk than banks because they depend more on market-sensitive funding and lack access to central bank funding. Fincos also have volatile revenue bases and face competition from banks. Korea's prudent regulatory supervision and oversight for fincos temper these weaknesses to some extent.

Mexico

Our anchor for Mexican NBFIs is 'bb-', which is three notches below the anchor for banks operating in the same country. This mainly reflects our view of the higher risks fincos face relative to banks, which stems from their weaker regulatory oversight and institutional framework. Even though fincos must comply with anti-money-laundering policies, the vast majority operate as nonregulated entities and don't have to comply with the local regulator's accounting requirements or minimum capital and liquidity ratios.

Additionally, Mexican fincos don't have central bank access and are highly dependent on wholesale funding, which limits their financial flexibility while increasing their funding risks and costs. We don't expect Mexican fincos will sharply increase funding from state-owned development banks in the next 12-24 months, nor do we expect government support to strengthen their funding.

Mongolia

The anchor for fincos in Mongolia is 'b-', which is two notches below the bank anchor. We believe fincos operating in Mongolia face higher industry risk than banks. They are also more dependent on market-sensitive funding and lack access to central bank funding.

Fincos face more competition than banks in Mongolia due to lower barriers to entry. The finco industry is fragmented, with a significant number of players (around 550 licensed NBFIs as of the end of June 2024). We believe regulatory oversight of the financial system in Mongolia is relaxed relative to international standards.

While the industry risk trend of the Mongolian banking sector is positive, reflecting improving regulatory supervision of banks that could sustain better asset quality and profits than in the past, we don't expect such improvement to extend to fincos in Mongolia. Therefore, even if we revised up the bank anchor to 'bb-', the finco anchor would remain 'b-', which would be the standard three notches below the bank anchor. Currently, the anchor is subject to a floor of 'b-'.

New Zealand

Our 'bb' anchor for fincos in New Zealand is the standard three notches below the bank anchor. The three notches reflect our view of the incrementally higher industry risk for fincos relative to banks. Funding risk for fincos is also higher than for banks, in our view, because they typically lack central bank access. 

Fincos operate under weaker regulatory oversight and a weaker institutional framework than banks in New Zealand. They also have higher competitive risks and typically less stable revenue through economic cycles.  

The New Zealand economy is open, prosperous, and flexible after decades of structural reforms. Following 0% growth in fiscal year 2024, we forecast real GDP growth will increase to 1.4% in fiscal 2025 and 2.5% in fiscal 2026.

But economic imbalances remain elevated. Following a decline of about 10% in fiscal 2023, house prices finished flat in fiscal 2024. We project modest growth in house prices over the next two years, supported by falling interest rates and ongoing migration. 

We forecast credit losses will remain low at about 15 basis points in fiscal 2025 and then fall to 10 basis points in fiscal 2026. New Zealand's external weaknesses--in particular, its high external debt and persistent current account deficits--accentuate economic risks. 

We consider the risk appetite of New Zealand's banks to be conservative. The industry structure--an oligopoly dominated by four large banks--is stable, in our view. Moreover, the banking sector's earnings are likely to remain adequate to absorb credit losses. However, the banking system's high share of net external borrowings remains a risk if a dislocation in international funding markets occurs. 

Saudi Arabia

The anchor for Saudi Arabia-based fincos is 'bb+', two notches lower than the 'bbb' anchor for commercial banks in the country. We believe fincos operating solely in Saudi Arabia face incrementally higher risks than banks. These risks include limited access to the central bank and a substantial reliance on wholesale funding. In addition, fincos face higher competitive risks because they are more susceptible to business cycles, leading to more volatile revenue and potential product substitution by banks, while banks generally have lower financing costs.

Our anchor for fincos in Saudi Arabia benefits from a positive adjustment, given these institutions have been regulated by the Saudi Arabian Monetary Authority (SAMA) since 2013. The regulations impose several requirements, including regulatory and public reporting of financials, minimum capital requirements, and both off-site and on-site inspections.

Furthermore, dividend payments to shareholders require the regulator's approval and may be blocked in cases of capital or liquidity insufficiency. SAMA also mitigates risks associated with large exposures and single-borrower concentrations, while establishing rules for maximum lending based on each finco's capital and reserves.

In recent years, SAMA has introduced new regulations for NBFIs, mandating quarterly risk reporting and requiring a nonobjection letter for the appointment of external auditors. These evolving regulations aim to address the needs of the developing financing sector, including areas such as real estate financing.

The asset quality of fincos remains weaker than banks' due to weaker credit characteristics in their target markets. However, the nonperforming loan ratio for the sector declined to 5.4% at year-end 2023 from 6.3% at year-end 2022, and we expect this trend to continue.

Singapore

Our 'bbb' anchor for fincos in Singapore is two notches below the anchor for banks. The two notches reflect incrementally higher industry risk for fincos in Singapore relative to banks because these companies are less diversified than banks and have a more narrow focus on secured SME financing. Fincos also face less stringent prudential regulation than banks do.

Taiwan

Our 'bb+' anchor for fincos in Taiwan is two notches lower than our bank anchor, reflecting that fincos in Taiwan are subsidiaries under the financial holding company structure and supervised by the Financial Supervisory Commission, which has prudential financial requirements and reporting standards that we view as less robust than those for banks.

In general, we think Taiwanese fincos have adequate profit margins and stable market shares among leading players, suggesting sufficient entry barriers. However, given that most fincos in Taiwan rely on wholesale funding and do not have direct access to central bank funding, their funding capability is weaker than that of banks, which benefit from diversified retail funding sources. 

The anchor is three notches below Taiwan's bank anchor for fincos that are regulated under the Ministry of Economic Affairs instead of the Financial Supervisory Commission. This is to reflect their less comprehensive and less stringent regulatory requirements. 

Thailand

Our starting point for rating fincos in Thailand is 'b+', two notches below the anchor for the banking sector in the country. The two notches reflect incrementally higher industry risk for fincos relative to banks because they depend more on market-sensitive funding, owing to their lack of access to central bank funding. Also, fincos face higher competitive risk and typically have less stable revenue through economic cycles. 

In addition, fincos operate under weaker regulatory oversight and a weaker institutional framework than banks in Thailand. Different product lines fall under the purview of different ministries. For example, land title loans are governed under the Civil and Commercial Code, while the Bank of Thailand has oversight over auto title loans, resulting in a fragmented regulatory structure. In our opinion, fincos in Thailand are not as prudentially regulated as commercial banks. 

U.K.

The anchor for nonbank fincos is three notches below the domestic bank anchor in the U.K. We believe the main risk for fincos is industry risk. Fincos do not have central bank access, which limits their financial flexibility, particularly during times of financial stress. They also face strong competition from banks and from each other, and given their concentration in fewer business lines, revenue can be volatile.

Fincos in the U.K. are regulated by the Financial Conduct Authority, as opposed to the Bank of England's Prudential Regulatory Authority. In general, they have weaker regulatory requirements than banks and are subject to less intensive oversight.

U.S.

Our anchor for fincos--including business development companies--in the U.S. is 'bb+'. We set the anchor for fincos three notches below the anchor for banks in the U.S. to reflect the typical lack of central bank access, lower regulatory oversight, and higher competitive risk for fincos relative to banks. We make a positive adjustment of one notch for a business development company that maintains a 200% regulatory asset coverage ratio and does not adopt the 150% modified asset coverage ratio permitted by the Small Business Credit Availability Act of 2018.

U.S. fincos typically rely on bank facilities, secured and unsecured debt, and other wholesale funding, whereas U.S. banks mainly rely on deposit funding. Unlike U.S. banks, U.S. fincos are not subject to significant prudential regulatory oversight of capital and liquidity, which we view as generally supportive of creditworthiness. While U.S. fincos may compete with banks, they often focus on higher-risk lending than banks and are subject to greater cyclical volatility. As with banks, the U.S. fincos' anchor reflects the country's diversified and high-income economy.

U.S. Federal Farm Credit Bank (FFCB)

Because of the FFCB's public policy role and regulated status, we adjust its anchor to 'bbb+', three notches above our anchor for other U.S. fincos and equal to the U.S. bank anchor. This is to account for the Farm Credit Administration's regulatory oversight, the system's favorable funding through its close relationship with the U.S. government, the benefits received from the Farm Credit System Insurance Corp., and the system's strong competitive position in the U.S. agriculture market.

U.S. Federal Home Loan Banks (FHLBs)

Because of the FHLBs' public policy role and regulatory status, we apply a sector-specific adjustment to raise the anchor for these entities to 'bbb+', three notches above the anchor for other U.S. fincos we rate under our financial institutions criteria. This is to account for the Federal Housing Finance Agency's regulatory oversight, the favorable funding FHLBs enjoy through their close relationship with the U.S. government, their strong competitive position alongside other housing-related government-sponsored enterprises (including Fannie Mae and Freddie Mac) in the U.S. housing finance market, and the statutory priority of liens in a bank wind-down situation.

Frequently asked questions

How does S&P Global Ratings derive NBFI anchors from the BICRA and bank anchors?   The foundation of our bank and finco anchors is our BICRA, which reflects the economic and industry risks in a particular country's financial system.

For NBFIs, we adjust the anchor to account for differences between the bank and NBFI sectors, as well as potentially for country-, sector-, and entity-specific factors.

We establish preliminary anchors for NBFI sectors relative to the bank anchor in the same country. We then may apply a country- or sector-specific adjustment or an entity-specific adjustment to arrive at the final anchor for an NBFI. However, the final anchor for an NBFI entity cannot be higher than the relevant bank anchor.

The preliminary anchors for the NBFI sectors reflect the typical incremental risks that NBFIs face relative to banks. In all countries, we set the preliminary anchor for fincos--including business development companies--three notches below the bank anchor, and the preliminary anchor for securities firms two notches below the bank anchor, subject to a floor at 'b-'.

The preliminary anchors for the finco sectors aim to reflect the additional risks that fincos face relative to banks. For example, if the bank anchor in a given country is 'bb+', the preliminary anchor for fincos in that same country is 'b+'. In our view, the incremental industry and economic risks for NBFIs relative to banks typically include the following:

• Lack of access to central bank funding, which increases liquidity and funding risks relative to banks;
• Strong competition from banks, exacerbated by banks' lower cost of financing;
• Higher competitive risk, both among themselves and relative to banks, because of lower barriers to entry and more volatile or fragmented business conditions; and
• Limited regulatory oversight compared with banks, which heightens fincos' sensitivity to changes in investor confidence.

What country-specific adjustments to the preliminary anchor does S&P Global Ratings make?  In some cases, a country- or sector-specific adjustment results in the NBFI anchor being higher or lower than the preliminary anchor. For an NBFI sector or subsector in a given country, we make a positive country- or sector-specific adjustment when we view the incremental risks relative to banks as materially lower than those identified in the preliminary anchor, and vice versa.

Examples of situations that may trigger a positive adjustment of one to three notches for fincos, or for specific subsectors within the finco sector, include:

• The NBFI sector or subsector benefits from a stronger institutional framework (government oversight) than is typical for such sectors. In some countries, fincos are regulated or have other supportive institutional framework elements.
• Funding is stronger for the specific NBFI sector or subsector than we typically observe for NBFIs. In some countries, fincos have direct or indirect access to central bank funding, for example through government-sponsored development banks.
• Regulations preserve the sector's or subsector's competitive position and, hence, reduce competitive risk. In some countries, government regulators restrict the number of licenses granted to NBFIs, which, upon receipt of a license, are required to undertake certain types of business.

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