NBFCs post healthy loan growth but margin, loan quality concerns remain

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Despite posting healthy loan growth across sectors, concerns regarding margin pressure and portfolio quality continued to weigh on the Q2 FY24 earnings of diversified NBFCs.

Most retail-focussed NBFCs saw credit growth being driven by both secured loans, such as automobile, housing, and small business loans, and unsecured and personal loans during the quarter.

Housing loan growth was largely led by the premium and luxury housing segments and self-construction. Vehicle finance witnessed a slower quarter due to monsoons and floods, which also impacted collections. Gold loan growth was muted to steady due to weak demand and intensifying competition in the segment, especially from players such as IIFL Finance and Bajaj Finance, Motilal Oswal Securities said in a note.

Drop in NIM

Lenders such as Aditya Birla Capital, Mahindra Finance, and LIC Housing Finance posted a sharp drop in their net interest margins (NIM) due to the higher cost of funds. Further, the higher AUM growth was partially offset by higher provisions and operating expenses on the back of more technological investments and employee hiring and retention.

“Credit costs shot up on a high base because of monsoon-related slippage. We are cutting FY24E and FY25E EPS by 25 per cent and 18 per cent, respectively, building in a lower NIM and a sharp hike in credit costs,” Nuvama Institutional Equities said on Mahindra Finance.

The credit exposure of banks to NBFCs stood at ₹14.2-lakh crore (pre-HDFC merger number) in September 2023, a 26.3 per cent y-o-y increase. The proportion of NBFC loans to banks’ total credit rose to 9.4 per cent from 8.9 per cent a year ago.

These NBFCs expect margins to start normalising in the coming quarters, led by sustained repricing of the fixed rate portfolio, especially vehicle finance, and an increase in the share of higher-yielding unsecured loans amid steady cost of funds. However, Bajaj Finance guided a further 25-30 bps compression in margins over FY24.

Several NBFCs reported higher provisions and credit costs, reflecting some pockets of stress in small-ticket or digital loans. Loan write-offs and provisions, prudent or otherwise, were elevated for lenders such as Shriram Finance, Mahindra Finance, Aditya Birla Capital, and Cholamandalam Finance.

Overall asset quality improved for most diversified NBFCs, but Bajaj Finance and Cholamandalam Finance highlighted trends of higher delinquencies across incremental small-ticket unsecured loans, largely being distributed through fintech partnerships. Most NBFCs said they have cut exposure to riskier borrowers, tightened underwriting standards, and are becoming more proactive in recoveries, especially for digital loan collections, while continuously monitoring these portfolios.

Shriram Finance, Bajaj Finance, CanFin Homes, and Poonawalla Fincorp are brokerages’ top picks from the sector. Loan growth is expected to remain strong for most lenders, supported by festival season-led spending, with lenders such as Mahindra Finance and Capri Global already posting record overall and car loan disbursals in October, respectively.