After facing persistent increase in funding costs non-bank lenders are looking at newer avenues of raising capital. Experts say that increasingly non-banks are diversifying away from bank lending and increasing proportion of higher yielding segments in their book.
“To address rising costs of funds many players have diversified their borrowing sources and reduced reliance on banks, while slightly raising lending rates and improving their asset mix by increasing the share of high-yielding assets such as MSME lending, used vehicle financing or micro secured loans,” said Avinash Singh, analyst with Emkay Global. “We expect NIMs to improve for most NBFCs within our coverage, driven by a better asset mix and moderating costs of funds.”
For the June 2024 quarter margins for most non-bank lenders remained under pressure due to increased borrowings and lower fee income. NBFCs saw a mixed June quarter with some moderation in AUM growth led by weak disbursements and some marginal weakness in asset quality and credit costs due to seasonality, elections, and heatwave in northern states.
Net interest margins including fees remained under pressure owing to low fee income, securitization, and higher cost of funds led by repricing of borrowings.
“The extreme heatwave and business disruption (caused by a prolonged electoral process) led to some deterioration in collection efficiencies thereby driving credit cost higher for some of the lenders,” Singh said.
“Looking ahead, growth should pick up gradually going into the festive season after above-average monsoons, and the margin trajectory should improve for most lenders as the repricing of borrowings is largely done. Increasing asset yields should aid margins and eventually the rate-cut cycle should accelerate margin expansion.”
Experts also say that with some exceptions of unsecured personal loans and MFIs, the trend in asset quality and credit cost should stay largely stable.
Credit costs saw a slight increase for most players due to seasonality, elections, and some stress in the micro portfolio, whereas overall asset quality remained largely stable. Though credit costs are expected to remain stable over FY25 on account of improved
collection effort, better customer selection, and improving product mix.
“We expect the overall growth trajectory to remain intact and the shortfall of Q1 to be recovered over the remaining quarters in FY25 supported by expanding distribution reach, product-level disbursement focus, better monsoons, increased government spend, and improving efficiency,” Singh said.
