NBFC

NBFCs Confront Growth Challenges Amid Asset Stress and Rising Funding Costs

The September quarter results highlighted a mixed performance for India’s non-banking financial companies (NBFCs) as regulatory actions from the Reserve Bank of India (RBI) and a slowdown in bank credit flow exerted pressure. Increasing funding costs and emerging asset quality concerns, particularly in retail, unsecured, and microfinance portfolios, impacted profitability in Q2 and may prompt downward revisions in FY25 earnings forecasts.

Key Highlights:

  Bajaj Finance, India’s largest retail NBFC, observed heightened asset stress across retail and SME portfolios, leading to a tightening of credit exposure in specific segments. Managing Director Rajeev Jain mentioned, “Our recent underwriting actions give us confidence that these should yield benefits by Q4.” Notably, Bajaj Finance reduced the share of borrowers with multiple personal loans to around 8-9% from a previous 13%.

   •       Rural and Microfinance Lending Concerns: Asset quality stress was particularly evident in rural and microfinance segments. Bajaj Finance faced challenges in its rural B2C portfolio, while Mahindra Finance attributed 40% of its rise in gross stage 3 assets in Q2 to the tractor segment. CEO Raul Rebello stated, “Agrarian states like Madhya Pradesh, Maharashtra, Gujarat, Andhra Pradesh, and Telangana have experienced cash flow disruptions affecting collections, especially in the CV and LCV segments.”

   •       Shift in Focus to Secured Lending: Both Bajaj Finance and Mahindra Finance have noted that while improving margins, they’re also prioritizing a move towards secured lending over unsecured segments to mitigate risks.

   •       Piramal Enterprises’ CEO Jairam Sridharan pointed out rising risks in unsecured business loans, especially within the sub-₹50,000 segment, where delinquencies have been increasing. However, he highlighted that the company’s exposure to this high-risk category remains limited at less than ₹750 crore.

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Noteworthy Outlier: Shriram Finance

Shriram Finance demonstrated strong performance with a 20% growth in assets under management (AUM) and improved asset quality. The company’s stage 2 and stage 3 assets declined by 6 and 7 basis points, respectively. According to Macquarie Capital, Shriram Finance has fared better than its peers due to its low exposure to the unsecured segment, maintaining a robust return on assets (ROA) of 3.1% over the past six quarters.

Sector-Wide Outlook

Industry analysts caution that sectoral stress and rising funding costs may slow NBFC growth and profitability for the remaining quarters of FY25. ICRA Ratings predicts NBFCs’ AUM growth could decelerate to 16-18% in FY25 from 25% in FY24. Additionally, the share of retail segment credit flow through NBFCs declined from 48.9% in 2023 to 42.9% in August 2024.

Regulatory Developments Impacting Growth

The RBI has been proactively addressing the risks in unsecured lending, which has seen rapid growth in the past year. In November 2023, the central bank increased risk weights on specific unsecured loan segments, including personal loans and credit cards, by 25 basis points to 125%. The RBI also raised risk weights on bank credit to NBFCs, limiting exposure to these high-growth areas to prevent asset quality issues.

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