NBFCs Expected to Report Strong Profit Growth on Loan Disbursements
Introduction
The second quarter financial results of non-banking finance companies (NBFCs) in India are anticipated to reveal a notable 20-30% growth in net profit, primarily driven by robust loan disbursements. However, the rising cost of funds may exert pressure on margins. Analysts predict that consumer-facing sectors, such as microfinance, consumer durable goods, and vehicle loans, will experience significant growth, while affordable housing and gold-loan companies might lag behind their peers due to factors like heightened competition and falling gold prices.
Growth in Net Profit Driven by Loan Disbursements
Non-banking finance companies (NBFCs) in India are anticipated to report a substantial 20-30% growth in net profit during the second quarter ending September 2023. This growth can be attributed to strong loan disbursements. However, it is important to note that margins might be affected due to the increase in the cost of funds.
Consumer-Facing Sectors to Lead Growth
Analysts expect microfinance, consumer durables, and vehicle loans to be the leading sectors driving growth for NBFCs. These sectors are likely to outperform affordable housing and gold-loan companies due to increased competition and a decline in the price of gold. Despite this, growth for affordable housing companies is expected to remain healthy, although larger companies may experience some moderation once their loan books exceed ₹15,000 crore.
Impact on Gold-Loan Companies
According to Motilal Oswal, the net interest margins (NIMs) of gold-loan companies, specifically Manappuram Finance and Muthoot Finance, may decline by 5 to 10 basis points due to heightened competition. It is important to note that one basis point represents 0.01 percentage point.
Diversified Lenders Expected to Perform Well
Diversified lenders, such as Bajaj Finance, Poonawalla Fincorp, L&T Finance, and non-vehicle segments of Shriram Finance, which have a presence in multiple sectors including MSME, two-wheelers, microfinance, consumer finance, pre-owned cars, and personal loans, are expected to experience healthy disbursement momentum. These lenders are likely to have a minor to no impact on NIMs and an improvement in asset quality.
Top Picks
Cholamandalam Investment & Finance Co, Fusion Microfinance, and Mahindra & Mahindra Financial Services have been listed as top picks from the sector by brokerage firm Motilal Oswal.
Margin Expansion for Certain Companies
Emkay predicts that the margins for Piramal Enterprises and Poonawalla Fincorp will expand due to improved cost of funding and lower borrowing. They emphasize the importance of these companies continuing their focus on retail growth and providing commentary on their growth and asset-quality outlook. Emkay also mentions the concerns regarding capital raises by some NBFCs, weaker monsoons, and increased stress in retail unsecured lending.
Asset Quality and Risk Management
Analysts do not anticipate any surprises in terms of asset quality. However, there are concerns about the stress building up in unsecured loans. The Reserve Bank of India recently urged banks and NBFCs to strengthen their risk management systems and closely monitor trends to prevent non-performing assets (NPAs). The central bank, through Deputy Governor J Swaminathan, has been monitoring the growth of unsecured retail loans, which have experienced an average growth of 33% in recent years, surpassing the growth rate of 12-14% in the rest of the banking sector.
In conclusion, non-banking finance companies in India are expected to witness significant profit growth driven by strong loan disbursements, although margins may be impacted by the rise in cost of funds. Consumer-facing sectors are projected to lead growth, while affordable housing and gold-loan companies may face challenges due to increased competition and declining gold prices. It is crucial for NBFCs to focus on asset quality, risk management, and provide commentary on their growth outlook to ensure sustainable performance in the future.
Disclaimer:
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