Bruised NBFCs are now facing the last hurdle of economic slowdown

A year after non-banking financial companies (NBFCs) were hit by the collapse of Infrastructure Leasing and Financial Services Ltd (IL&FS), normalcy still eludes lenders.

Since August 2018, NBFCs have faced a liquidity crunch, which also affected the solvency of some lenders. All lenders had to contend with rising funding costs, as investors lost trust in the sector and turned cautious.

But non-bank lenders have been on the mend, with those catering to consumption-based borrowing doing well. Indeed, investors had hoped that all would not be lost on the growth front, given that some strong balance sheets held on. Perhaps this optimism is still visible as the Nifty Financial Services index has outstripped the broader market in the last 12 months.

That said, NBFC stocks are still far from their levels seen before the IL&FS crisis. That’s because in the last stage of mending, non-bank lenders find themselves facing a new hurdle, which could deflate their hopes of returning to a normal growth rate.

The economic slowdown has cast a long shadow on the business of lenders. The slowdown does not cover certain pockets anymore and is more broad-based. Granted that the severe contraction in the automobile sector could exacerbate slowdown concerns. Nevertheless, elsewhere, too, consumption is decelerating.

“While the battles around liquidity, ALM, margins and perception have clearly been won, the final battle, i.e., economic slowdown, is still raging. Slower growth in the next 12 months could result in some operating de-levering and some increase in NPAs,” said analysts at Antique Stock Broking Ltd.

India Ratings and Research Pvt. Ltd, too, has slashed its FY20 growth estimate for the NBFC sector from the earlier 15% to 12%. Not only fresh business could be hard to come by, but existing borrowers, too, may show some signs of stress. What makes things worse is falling interest rates. With banks slashing loan rates and linking retail loans to external benchmarks, NBFCs would be hard-pressed.

Pressure on margins is palpable, which is another blow to the earnings. The worst affected would be housing finance companies because of the protracted slowdown in the realty sector.

But even consumer finance lenders, such as Bajaj Finance Ltd, have started feeling the heat—and pressure on growth. For the June quarter, it reported a sharp fall in disbursements of new loans.

Surely, consumer lenders are expected to show better growth on various parameters than most peers. Even so, these have been lower than in previous quarters.

NBFCs now face a tough battle ahead as the slowdown not only affects future growth, but also the quality of loans. Investors would need to be patient as any sharp pickup seems unlikely until FY21.