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MUMBAI : Non-banking financial companies expect a turnaround in loan disbursements this year, especially from rural areas, though consumers remain cautious about spending, and lenders face increased operation costs because of inflation.

Mahindra Finance, which is looking to double its business growth this year, is expecting loan disbursements to pick up with an increase in vehicle prices and a possible easing of chip shortages. The non-bank lender is also looking to diversify its portfolio, with 15% of the loan book coming from non-vehicle segments such as SME, property and leasing.

“Our collections were surpassing disbursements so far. It’s now that we have started disbursements growth. Assets this quarter have grown marginally by 1-1.5%. I don’t have a doubt that asset growth is beginning to happen. Vehicle prices will go up. Even for the same volume, the value of disbursement will be high. Once the chip problem gets sorted, sales will go up. Markets are opening up, and demand is picking up," Ramesh Iyer, managing director and chief executive of Mahindra Finance, said in an interview.

Shriram Transport Finance, too, is expecting strong rural demand for used and small commercial vehicle finance loans. The non-bank lender saw 10% sequential growth in disbursements as price hikes in both new and used CVs led to higher ticket sizes, aiding value growth in disbursements. But volume growth still remains muted.

“Rural demand is very high. Used vehicle and small commercial vehicle demand are good. Heavy commercial vehicle demand had increased in March, but it subsided in April. Demand may come once geopolitical tensions come to a closure. Government spending has also slowed down," Umesh Revankar, managing director of Shriram Transport Finance, said in a post-earnings call with investors.

Credit growth for the banking system saw a significant pickup in the early part of fiscal 2023 to 11.2% from 5.3% a year ago. According to India Ratings, credit growth may be muted in the near term.

“Tailwinds are being driven by a pickup in credit growth from industry and services segments (basis February 2022 data), even as growth in the agriculture segment remains stable and muted in the retail segment. Over the medium term, inflationary pressures, supply chain disruptions and weak consumer demand could upset the current revival in credit growth. Furthermore, the reversal of the interest rate cycle as signified by the 40 basis points increase in repo rate by the Reserve Bank of India would weigh on credit growth as borrowings become costlier," the rating agency said.

Iyer said that while the sentiment has improved, rural customers continue to be cautious about spending in the post-covid era. While aspirational spending has reduced, demand for livelihood assets has risen and that for non-livelihood assets continues to be weak—this even as operational costs have increased, resulting in a shrinking of margins.

A 22 April IIFL report said there are signs of stress in rural areas, adding that real wage growth has been stagnant while unemployment has been stubborn at 7% amid falling labour participation.

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