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When India’s non-bank lenders begin to detail their performance for the March quarter, investors are expecting a stronger end to a tumultuous FY21. In all probability, key profitability metrics will show strength but the devil may lie in the details.

Most non-banking financial companies (NBFCs) may report healthy sequential growth in loan disbursements, continuing with the steady improvement since the weak first quarter. Pent-up demand and the festival momentum in consumption may have helped lenders witness healthy growth. Disbursement growth, along with the sharp fall in the cost of funds, may boost interest income for lenders. Analysts are pencilling in high single-digit loan growth for large NBFCs such as Bajaj Finance, Mahindra and Mahindra Financial Services Ltd, Shriram Transport Finance Corp. Ltd and Sundaram Finance Ltd.

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“4QFY21 was a strong quarter for NBFCs with disbursements picking up quarter-on-quarter across the board driven by moratorium exit, pent-up and seasonally strong demand. Net interest margin (NIM) trends are likely mixed, reflecting transitionary impact of falling interest rates and run down of padded liquidity," wrote analysts at Kotak Institutional Equities in a note.

In other words, optically the March quarter may look strong simply because of a series of one-time events such as pent-up demand, seasonal factors and base effect. What investors need to look at is the sustainability of these metrics. Here, the outlook has several headwinds with the biggest challenge being the second wave of the pandemic. Most analysts have pointed out that the risk of regional lockdowns and the expected disruption may upset the growth metrics of NBFCs in FY22.

“We think earnings upgrades will likely take a brief pause with covid-19 cases spiking up again and localized lockdowns impacting business momentum," wrote Nomura Financial Advisory and Securities (India) Pvt. Ltd.

Lockdowns not only disrupt growth but also affect asset quality. As such, NBFCs witnessed their stressed pool increase during the December quarter and fresh slippages are expected to rise in the March quarter. Nevertheless, asset quality metrics will show the true impact of a complete exit from the moratorium and sans any forbearance. Housing finance companies will be a stronger lot largely due to limited asset quality issues, while vehicle financiers may show increasing stress amid strong loan growth.

Investors are wary of the resurgence in covid-19 and shares of most NBFCs have dropped in the past one month. While Q4 metrics may give credence to expectations of steady improvement, FY22 comes with bigger challenges.

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