2023 a tough year for NBFCs despite rosy credit outlook

The potential bottoming of margins largely by Q2FY24 can be a re-rating trigger for the sector. Photo: Mint
The potential bottoming of margins largely by Q2FY24 can be a re-rating trigger for the sector. Photo: Mint

Summary

The trajectory in overall systemic credit growth has been encouraging so far, in spite of a spree of interest rate hikes.

The momentum in loan growth seen in 2022 is likely to sustain in the new year as well. Like in the case of banks, better traction in housing demand and auto sales has also aided credit growth for non-banking financial companies (NBFCs) lately. The trajectory in overall systemic credit growth has been encouraging so far, in spite of a spree of interest rate hikes.

Also, Q3 is a seasonally strong quarter for the NBFCs due to the festive season. Analysts at Motilal Oswal Financial Services Ltd expect asset quality improvement across the board, except potentially for LIC Housing Finance Ltd, where there could still be slippages from the restructured pool of advances. “Lower bounce rates, higher collections, and customer settlements would likely translate into an improvement in gross stage 3 and sequential decline in credit costs," said the report. Gross stage 3 are potentially risky assets. That said, the sector faces a crucial risk in the form of rising cost of funds, which points to net interest margin (NIM) pressure. A lag in transmission of repo rate hikes aided NIM for the sector in the recent quarters, but that is poised to change.

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Graphic: Mint

“While interest rate hikes may peak out in 2023, margins of most NBFCs should fall year-on-year in 2023 (FY24) as the full impact of higher interest rates will be reflected in average funding costs next year," said a Jefferies India Pvt. Ltd report. The potential bottoming of NIMs largely by Q2FY24 can be a re-rating trigger for the sector, it added. Another worry is that as NBFCs and housing finance companies transmit repo rate increases to customers, it could weigh on demand for loans, especially in the backdrop of rising competition from banks.

“In the retail segment, banks are giving competition to NBFCs. Just look at Bajaj Finance Ltd. Despite the highest-ever quarterly increase in its customer franchise in Q3FY23, assets under management were below the Street’s expectations," said an analyst, requesting anonymity. So, NBFCs and HFCs may not be able to adequately pass on the burden of increased interest rates to consumers, which is a risk to NIM, he added.

Meanwhile, in CY22, the Nifty Financial Services Index, which comprises NBFC stocks, rose 8.37%, underperforming the Nifty Bank index, which gave 20% returns. Within NBFCS, the stock performance was a mixed bag in CY22, with most auto financiers faring much better than HFCs . Among HFCs, affordable housing financiers gave dismal returns. Besides NIM, asset quality and slippages trends are key.

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