Mumbai: Earnings momentum in non-banking finance companies (NBFCs) is likely to continue due to sustained credit demand from the low-to-middle income and self-employed segments, even as higher cost of funds and tightening Reserve Bank of India (RBI) regulations will squeeze net interest margins (NIMs) and cloud the medium-term outlook.
Analysts said NBFCs across asset classes from microfinance to housing to vehicle finance are expected to record healthy growth in the third quarter that ended December 2023. However, there will be a differentiation of the impact on margins for these companies due to the rise in the cost of funds.
“For instance, NIM of microfinance companies (MFIs) may improve with incremental repricing of portfolio and NIM of housing finance companies (HFCs) may come off due to competitive pressure on portfolio yield,” said Yes Securities. The brokerage expects a sustained growth momentum for HFCs but a slight deceleration for vehicle financiers due to a higher base.
Microfinance disbursements are expected to be healthy and driven by good traction in new borrower acquisition and regional diversification, while gold loan companies will report a muted growth in assets versus the second quarter, Yes Securities said.
Besides the higher cost of funds, NBFCs will also be hit by the RBI increasing risk weights on bank loans to NBFCs in November to 125% from 100%. “We will see the initial impact of that move in the third quarter which will also hit margins. Though credit growth is expected to be above 20% riding on economic momentum. The broad theme for the next fiscal is likely to be margin shrinkage,” said Anusha Raheja, analyst at LKP Securities.
Another RBI circular prohibiting regulated entities from making investments in units of alternative investment funds (AIFs) which have invested in companies that had previously taken a loan or investment exposure anytime during the preceding 12 months could also impact NBFCs which are in this business.
Nomura Securities said that the RBI’s tightening of bank risk weights alter credit costs for NBFCs but also have a negative impact on the AUM growth which was about 25% to 30% of the incremental loan growth for NBFCs during fiscal 2022 and the second quarter of fiscal 2024.
“We expect the RBI’s decision to increase the risk weights, to nudge NBFCs to increase yields leading to a negative impact on loan demand to protect profitability or to take a hit on profitability and keep loan growth and yield intact. In auto loans, loan growth should moderate in calendar 2024 as the base impact of last year catches up. On the positive side, we expect trends in SMEs, especially in micro SMEs and MFI, to remain strong in calendar 2024 as well. Overall, we expect the high growth recorded by major NBFCs to come under pressure,” Nomura said.
