NBFCs brace for slower growth as asset stress, fund costs pinch

  • Bajaj Finance and Mahindra Finance have indicated that any improvement in margins will not necessarily lead to increased profitability as they look to cut exposure to unsecured segments

Anshika Kayastha
Published4 Nov 2024, 02:52 PM IST
A sizeable portion of bank credit flow to the NBFCs is towards on-lending to the retail segments. (Image: Pixabay)
A sizeable portion of bank credit flow to the NBFCs is towards on-lending to the retail segments. (Image: Pixabay)

Mumbai: The September quarter results for non-banking financial companies (NBFCs) were mixed, as most lenders felt the ripple effects of the Reserve Bank of India’s recent regulatory actions and slowdown in credit flow from banks. 

Higher funding costs and emerging asset quality concerns—especially in retail, unsecured, and microfinance portfolios—hit profitability in the second quarter, and may lead to a cut in earnings forecasts for FY25.

Bajaj Finance, India’s largest retail-focused NBFC, observed rising stress across retail and SME portfolios. As a response, the company has been tightening credit exposure in specific segments. 

“The underwriting actions that we have taken in the last 4-5 months, also gives us the confidence that...(it) should start to result in benefit from Q4,” managing director Rajeev Jain said in the analyst call. He added that the company's recent measures have reduced the share of borrowers with three or more personal loans to around 8-9% from a previous 13%.

A major source of asset quality stress across NBFCs was rural and microfinance lending. Bajaj Finance highlighted issues in its rural B2C portfolio, while Mahindra & Mahindra Financial Services (or Mahindra Finance) attributed 40% of its sequential rise in gross stage 3 assets in Q2 to the tractor segment.

“It is mostly the agrarian states where cash flows have been disrupted– Madhya Pradesh, Maharashtra, Gujarat, Andhra Pradesh, and Telangana. These states have seen a slightly higher amount of pain,” Mahindra Finance's MD and CEO Raul Rebello said in the earnings call. “The cash flow is not just in the agri sector, but some of the LCV (light commercial vehicle)… the CV customer segment has also seen a bit of elevated pain in Q2 which has had a bearing on our collection efficiency. And the intensity of our collection has had to go up.”

Both Bajaj Finance and Mahindra Finance have indicated that any margin improvement will not necessarily lead to increased profitability as they look to cut exposure to unsecured segments and invest in secured lines of business.

Jairam Sridharan, CEO of retail lending at Piramal Enterprises, said that among unsecured loans, "the most steady increase in risk” was in business loans, including some microfinance portfolios.

“The 90-day delinquency has been trending up. The portfolio is also seasoning, so that has something to do with this, apart from what's going on in the macro environment as well. Within unsecured business loans, and all unsecured loans in general, sub- 50,000 category is where we are seeing the steepest risk deterioration,” Sridharan said, adding that the company’s exposure to this segment was less than 750 crore. 

Also Read: Tight liquidity forces Indian NBFCs to look overseas 

Best of the rest

Shriram Finance was the outlier, posting better asset quality for the quarter and steady growth of around 20% in its AUM. Stage 2 and stage 3 assets declined 6 bps and 7 bps in the quarter, respectively.

“This is in complete contrast to the numbers reported by peers. Management highlighted that while there are signs of overleveraging and stress in the unsecured segment, the company appears to have fared relatively better than peers on account of low exposure (personal mix at 3%). ROA (return on assets) remains strong and consistent (3.1% over the past six quarters), which we find commendable,” Macquarie Capital said in a note.

Also Read: RBI bars Sachin Bansal’s Navi Finserv, three other NBFCs from lending over pricing violations

According to industry experts, sectoral stress and the higher cost of funds are expected to weigh on NBFCs’ growth and profitability for the remaining two quarters of FY25.

In a recent note, Icra Ratings said it expects growth in NBFCs' assets under management to slow sharply to 16-18% in FY25 from 25% in FY24. The share of the retail segment and NBFCs in banks' incremental credit flow declined to 42.9% as of August 2024 from 48.9% a year ago.

“As a sizeable portion of bank credit flow to the NBFCs is towards on-lending to the retail segments, overall credit to the retail segment may slow down in the next 12-18 months” Icra said. 

While demand for retail credit remains strong, the regulatory nudge to prevent overheating in certain segments of the retail space is the key factor driving slower growth,

The RBI has been highlighting the significant growth in unsecured lending over the past year, along with potential challenges related to asset quality. In November 2023, the central bank increased the risk weights on specific segments of unsecured loans, such as personal loans and credit cards, by 25 percentage points, bringing them to 125%. Additionally, it raised the risk weights on bank credit to NBFCs. Following the covid pandemic, banks had significantly increased their lending to NBFCs, primarily driven by the growth in retail and unsecured loans.

Also Read: To know RBI’s next crackdown, pay attention to officials’ speeches

 

 

Catch all the Industry News, Banking News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates.

MoreLess
First Published:4 Nov 2024, 02:52 PM IST
Business NewsIndustryBankingNBFCs brace for slower growth as asset stress, fund costs pinch

Get Instant Loan up to ₹10 Lakh!

  • Employment Type

    Most Active Stocks

    Power Grid Corporation Of India share price

    339.45
    02:49 PM | 26 NOV 2024
    -3.4 (-0.99%)

    Adani Power share price

    439.40
    02:49 PM | 26 NOV 2024
    -7.45 (-1.67%)

    Bharat Electronics share price

    298.70
    02:49 PM | 26 NOV 2024
    6.25 (2.14%)

    GAIL India share price

    194.80
    02:49 PM | 26 NOV 2024
    -4.35 (-2.18%)
    More Active Stocks

    Market Snapshot

    • Top Gainers
    • Top Losers
    • 52 Week High

    Piramal Enterprises share price

    1,193.40
    02:41 PM | 26 NOV 2024
    85.6 (7.73%)

    Laurus Labs share price

    547.10
    02:41 PM | 26 NOV 2024
    14.95 (2.81%)

    Wipro share price

    587.45
    02:42 PM | 26 NOV 2024
    4.7 (0.81%)

    Praj Industries share price

    799.90
    02:41 PM | 26 NOV 2024
    0.7 (0.09%)
    More from 52 Week High

    Poly Medicure share price

    2,781.90
    02:38 PM | 26 NOV 2024
    -220.8 (-7.35%)

    Adani Green Energy share price

    913.55
    02:42 PM | 26 NOV 2024
    -54.1 (-5.59%)

    DCM Shriram share price

    1,160.00
    02:40 PM | 26 NOV 2024
    -67.3 (-5.48%)

    Fortis Healthcare share price

    668.35
    02:42 PM | 26 NOV 2024
    -32.4 (-4.62%)
    More from Top Losers

    Triveni Turbines share price

    834.00
    02:42 PM | 26 NOV 2024
    70.1 (9.18%)

    Vodafone Idea share price

    7.62
    02:42 PM | 26 NOV 2024
    0.64 (9.17%)

    Piramal Enterprises share price

    1,193.40
    02:41 PM | 26 NOV 2024
    85.6 (7.73%)

    Sonata Software share price

    591.00
    02:41 PM | 26 NOV 2024
    39.45 (7.15%)
    More from Top Gainers

    Recommended For You

      More Recommendations

      Gold Prices

      • 24K
      • 22K
      Bangalore
      78,555.00-1,090.00
      Chennai
      78,561.00-1,090.00
      Delhi
      78,713.00-1,090.00
      Kolkata
      78,565.00-1,090.00

      Fuel Price

      • Petrol
      • Diesel
      Bangalore
      102.92/L0.00
      Chennai
      100.90/L0.00
      Kolkata
      104.95/L0.00
      New Delhi
      94.77/L0.00

      Popular in Industry

        HomeMarketsPremiumMint Shorts