Non-banking financial companies (NBFCs) are likely to experience a slowdown in disbursements during the April-June period due to prolonged electoral activities and disruptions caused by extreme heatwaves. Despite this temporary setback, the long-term outlook for the sector remains positive.
The first quarter, typically a seasonally weak period, is expected to see muted growth in disbursements across the NBFC sector. This slowdown can be attributed to uncertainties surrounding the monsoon and a decline in commercial vehicle sales.
Additionally, a moderation in disbursement growth is anticipated due to a slowdown in unsecured loans amid increased regulatory oversight. Key segments such as automobile and microfinance are also experiencing a downturn, compounded by elevated competition from banks in secured segments like mortgage loans.
As the results season for NBFCs kicks off on July 10 with SG Finserve, the sector’s performance will be closely monitored.
Cost of borrowing
The cost of borrowing for NBFCs remained high in the reporting quarter due to banks hiking their marginal cost of funds-based lending rates (MCLRs), preventing an expansion in net interest margins. However, fixed-rate lenders, particularly vehicle finance companies that increased lending rates in the previous quarter, have started seeing some improvement in their net interest margins.
At the sectoral level, the net interest margin is expected to remain flat for vehicle financiers, with a potential compression for housing finance companies (except PNB Housing Finance) and microfinance institutions. April is typically a weak month for mortgage financiers, further contributing to the subdued performance.
Segment-wise
On the other hand, gold loan companies and diversified financiers are expected to deliver stronger loan growth. While overall industry loan growth is projected to be below par, a few large NBFCs may report good growth numbers. Affordable housing finance companies and large retail NBFCs are anticipated to outperform their peers.
Rural-focused NBFCs, such as microfinance companies, may see an increase in credit costs due to loan waiver schemes announced in some states. However, asset quality for most players is expected to remain stable, driven by strong customer selection and tightened credit underwriting policies.
The prospects of interest rate cuts have been pushed to the fourth quarter of FY25, deferring potential improvements in net interest margins. Nonetheless, stable asset quality and benign credit costs are likely to support profitable growth for NBFCs in the long term.
