MUMBAI: Liquidity pressures and high cost of funds are likely to pressure margins of non banking finance companies (NBFCs) during the third quarter ended December 2024. Micro finance companies and NBFCs having a high percentage of unsecured loans may also be impacted due to payment delays by borrowers during the quarter, analysts said.
Shweta Daptardar, analyst at Elara Securities said she expects NBFC net interest margins (NIMs) to drop 13 basis points year on year. One basis point is 0.01 percentage point.
“There is an increased focus on liability diversification amid rising costs. The third quarter is expected to pressurise NIM, and credit costs are likely to see a spike. Companies are bolstering provisions and operational efficiency to sustain profitability, though a dip in return on assets is expected this quarter,” Daptardar said.
Elara expects aggregate credit growth for NBFC’s covered by the brokerage to decelerate to below 18% year on year down from more than 20% a year ago. The growth moderation could prolong till the end of the current fiscal as NBFCs tackle challenges of funding, balance sheet risks and business remodeling, the brokerage said.
Motilal Oswal analyst Abhijit Tibrewal said improvement in asset quality expected in the seasonally stronger second half of the fiscal year has not materialized in the third quarter. “While there was no alarming deterioration, the asset quality either remained stable (relative to expectations of an improvement) or exhibited minor deterioration. Credit costs are expected to remain elevated in micro finance with expectations of a sequential increase (in absolute terms)…Except for affordable housing and power financiers, credit costs are expected to remain elevated for vehicle financiers (except Mahindra & Mahindra Finance) and diversified lenders,” Tibrewal said.
Motilal expects a net profit growth of around 8% year on year for its coverage universe, driven by weaker NIM, sticky credit costs, and yet another stressed quarter for micro finance companies. Large NBFCs kick off results from Monday starting with L&T Finance.
IDBI Capital analyst Bunty Chawla expects NBFC loan book growth to moderate during the quarter due to subdued vehicle financing.
“Asset quality to deteriorate for NBFCs and housing finance companies with stage 3 assets expected to inch up quarter on quarter due to lower collection efficiency as well as impact of invariable rainfall,” Chawla said.
Muted gold prices and subdued competition will support gold finance companies during the quarter, Chawla said.
Systemic overleveraging, regional challenges and heightened regulatory scrutiny is expected impact asset quality for retail NBFCs, Elara Securities said.
“The bulk of NBFC stress is concentrated in retail loans (35% of NBFC credit), with micro finance (representing 3.4% of total loans and 9.6% of retail loans), a key concern. Third quarter may peak out in terms of credit cost, but fourth quarter credit cost outlook is also gloomy, given persistent industry headwinds and conservative provisioning strategies led by increased regulatory oversight,” Daptardar wrote in her note.
Elara expects NPAs for NBFCs under its watch to rise 6 basis points while credit costs to increase 56 basis points year on year. “Q3 may peak out in terms of credit cost, but Q4 credit cost outlook is also gloomy, given persistent industry headwinds and conservative provisioning strategies led by increased regulatory oversight,” Daptardar said.
Source: The Economic Times
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