Home / Market / Mark-to-market /  For NBFCs, the ride through the tunnel has just begun

Mumbai: Non-banking finance companies (NBFCs) had great going for them this year until demonetisation pulled the brake. Since 9 November, when demonetisation took effect, NBFC shares have lost massively, some more than others depending on how vulnerable they were perceived to the currency withdrawal.

Of the 19 NBFCs that belong to the BSE 200 index, most have lost at least half of their gains made before demonetisation. From conglomerates like Bajaj Finance, Mahindra Finance and L&T Finance to micro lenders like Bharat Financial Ltd, Satin Creditcare and Gruh Finance all have borne the brunt of investor pessimism.

Part of the erosion in stock prices has to do with princely valuations as well which analysts were beginning to flag off as a concern a few months back. Some of the big NBFCs were trading at multiples that rivalled and even triumphed that of the most valued banks such as HDFC Bank, State Bank of India, and Kotak Mahindra Bank.

The concerns that investors associated with NBFCs in the fallout of demonetisation are firstly the hit on loan disbursals as demand in the economy slows and secondly the health of the existing loan book. NBFCs by nature have a riskier loan book compared with banks and some lenders do not have a diversified loan portfolio to take comfort from. NBFCs focused on cash-intensive sectors, consumer finance and those betting on the rural economy are expected to be hit the most. This explains why shares of Shriram Transport Finance Ltd, Mahindra Finance, Mannapuram and even Dewan Housing Finance Ltd fell so sharply following demonetisation.

Recall that growth and loan book health were touted as the strongest of the factors that set NBFCs apart from banks and rightly so. While banks besieged by bad loans were busy putting their house in order, NBFCs had begun to venture into lending segments typically ruled by banks. NBFCs saw their loan book expand by 37% between FY14 and FY16, which is twice the pace of the about 19% growth that banks reported, according to Reserve Bank of India. The bad loan ratio of NBFCs is far lower than that of banks.

Despite these headwinds, some lenders do stand tall. Housing finance companies (HFCs) that operate mainly in the affordable housing loan segment and having a low proportion of loan against property have weathered the demonetisation storm.

So will the erosion in valuation and earnings expectations halt the slide in stock prices? Demonetisation may have shown the banking sector the light at the end of the tunnel but for NBFCs, the ride through the tunnel has just begun. It could be a while before they begin commanding rich valuations again.

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