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NBFCs focussed more on collection than giving moratorium, unlike banks and this would come to help.
NBFCs focussed more on collection than giving moratorium, unlike banks and this would come to help.

Third quarter may cheer NBFCs, but true stress yet to be revealed

  • Loan collection and disbursements improved for most lenders, brightening their outlook
  • Actual stress may not get reflected due to the govt’s loan guarantee scheme, judicial standstill

After a gruelling two quarters due to the pandemic, India’s non-banking financial companies (NBFC) may find some succour in the December quarter because of proactive provisioning and recovery in collections. However, investors should not let their guard down just yet.

Two big trends in the past three months have given confidence to investors on NBFCs. Improving collection efficiencies and an improvement in loan disbursements for most lenders have brightened the outlook.

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NBFCs have been able to get back money from borrowers more easily than before, with collection efficiencies showing an increase every month. For most lenders, collections are just a hair’s breadth away from pre-covid levels. This is the outcome of coaxing customers to pay up instead of offering an easy way out through the moratorium. As debtors are back on schedule, loans that may require easier terms through restructuring are expected to be low for NBFCs. “While asset quality recognition seems to have been pushed out [beyond the December quartern], the focus will remain on ascertaining stress and a lower restructuring offtake along with improving collection efficiency should provide some comfort," wrote analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd.

Crouching trouble, hidden stress
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Crouching trouble, hidden stress

That said, the moratorium level in August, when it concluded, was high among NBFCs compared to banking peers. This does not reconcile with the management commentary by various NBFCs stating low recast numbers. What’s more, the government’s credit guarantee scheme for small business loans takes the risks off lenders’ books. In other words, the actual stress of small business borrowers does not get reflected adequately. Analysts at Kotak Institutional Equities Ltd have flagged this challenge in determining the true stress on the books of NBFCs.

The second positive trend has been an increase in loan disbursements. Here, the performance is divergent among players. Housing finance companies have reported the strongest set of numbers, with HDFC Ltd leading the pack. “Within NBFCs, we expect HDFC to report strongest growth in core operating profit, though reported profit should be down 66% from a high base that included MTM gain when stake in Gruh Finance Ltd was swapped for shares in Bandhan," wrote analysts at Jefferies India Pvt. Ltd in a note.

Vehicle financiers have also shown a sharp improvement, which sits well with the bounce back in automobile sales. Rural market buoyancy meant that commercial vehicle sales are also looking up, which augurs well for tractor and truck financier Mahindra and Mahindra Financial Services Ltd.

Shares of big NBFCs have risen sharply in the past three months, with those of HDFC Ltd and Bajaj Finance Ltd going beyond pre-covid highs. However, valuations may cause discomfort, especially as a judicial standstill has distorted the true bad loan picture.

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