Healthy credit cycle set to keep NBFCs on growth track in Q1

Synopsis

Non-banking finance companies are poised for a strong April-June quarter, with analysts predicting a 20% rise in assets under management. This growth is fueled by robust loan demand, particularly in affordable housing and microfinance, alongside steady commercial vehicle financing. Despite a traditionally slow start, collection efficiency remains high, and falling bond yields are expected to lower funding costs, promising stable profits and continued loan expansion.

Mumbai: Non-banking finance companies (NBFCs) are expected to report stable profits for the April-June quarter, aided by strong loan momentum, stable asset quality and firm consumer demand.

Analysts expect a 20% year-on-year increase in assets under management (AUM) of NBFCs on average during the first quarter of this financial year, led by growth in affordable housing companies, a recovery in micro finance and steady momentum in commercial vehicles despite issues related to fuel availability amid the US-Israel war against Iran.

The growth momentum appears strong and collection efficiency sticky despite the first quarter being traditionally slow, said Shreepal Doshi, analyst at Equirus Securities. "Not only for the first quarter but things are also looking up for the immediate future as bond yields have come off sharply, which is positive for NBFCs' cost of funds. We expect a steady performance with a 20-22% loan growth and much faster growth for smaller companies," Doshi said.

The benchmark 10-year bond yield has fallen sharply to 6.72% from a recent peak of 7.12%, helped by falling oil prices and a surge in dollar inflows after the Reserve Bank of India and the government eased foreign portfolio investment and tax rules.

Agencies

Analysts expect 20% rise in AUM led by affordable housing cos, microloan recovery and CV financing

Large NBFCs have shown robust growth in their preliminary first quarter numbers. Bajaj Finance, for instance, reported a 24% year-on-year (YoY) growth in AUM to ₹5.46 lakh crore, as of June 30, with new loan bookings up 20% YoY.

L&T Finance reported a 28% expansion in its retail loan book at ₹1.27 lakh crore. Retail loan disbursements increased 36% YoY to ₹23,800 crore for the quarter ended June. L&T Finance kicks off the NBFC results season on July 10.

IIFL Capital analyst Viral Shah said a favourable base for affordable housing, absence of typical first quarter microfinance stress this time and improving asset quality in other consumer retail segments supported NBFC growth during the quarter.

"We expect growth momentum for NBFCs under coverage to hold up well, with AUM growth of about 19% YoY with momentum broad-based across NBFCs/sub-segments, enabling in-line/above consensus growth for most NBFCs," IIFL Capital said.

"We expect aggregate NIMs (net interest margins) for NBFCs under coverage to be flat quarter over quarter with minimal impact from elevated market rates on overall cost of funds. We expect the underlying asset quality trends to remain healthy, in line with our alternate and high frequency data signals, reflective in 15 to 45 basis points yoy reduction in credit costs."

A basis point is a hundredth of a percentage point.

Gold loan companies could be under pressure, though, due to increased competition and fall in gold prices during the quarter which would have restricted their ability to lend. Gold prices have fallen about 30% from their peak in January amid weaker demand and expectations that interest rates will continue to stay high.

Anmol Das, head of research at Swyon Advisors, an alternative investment fund, said commercial vehicle (CV) sale trends point to a strong performance by NBFCs linked to financing them.

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