NBFCs face challenges amid soft interest rate regime

Updated : February 23, 2021 03:03 PM IST

The trend in market share losses for NBFCs to banks is continuing, especially in housing and private auto segments.

Non-banking financial companies (NBFCs) are witnessing a continuous loss in market share to banks as customers are favouring the latter due to lower interest rates and longer loan tenures.

NBFCs continue to bet on the underbanked and new-to-credit segments to manage growth momentum while focusing on specific product segments such as used vehicle finance, affordable housing and low-ticket MSME loans.

However, the trend in the market share losses for NBFCs to banks is continuing, especially in housing and private auto segments.

According to a report by Emkay Global Financial Services, new housing loans -- especially in the affordable category -- used vehicle loans and MSME loans are seeing significant momentum, followed by auto and two-wheelers, while the cautious stance stays regarding unsecured loans.

The report cited the diversity in liability profile for NBFCs, along with surprising trends in the marginal cost of funds. NBFCs with strong parentage, such as HDFC, Bajaj Finance and LIC Housing Finance, have reported marginal incremental cost of funds in the range of 5-5.5 percent, which is historical low.

Meanwhile, the shift toward MCLR-linked bank borrowing has aided in trimming the cost of funds.

"With the elevated share of fixed-rate lending, margin improvement is expected to stay for most NBFCs. NBFC source of funds diversify further over the last 12 months. But the borrowing from bank financing remains more or less same in Q3FY21 vs Q3 FY20," the brokerage report added.

It remained concerned about the steep rise in stage-2 assets, along with probable write-offs in Q4. Emkay Research's discussions with NBFC management indicate that rise in stage-2 assets is due to normalisation of business after two quarters of moratorium, which is expected to ease out in the coming quarters.

Also, managements are avoiding a shift in portfolios from stage 2 to stage 3 (NPA) -- keeping overall pool of stage-2 assets elevated. On the collection efficiency side, although collections against current month bill had seen significant improvement, collection toward arrears is lagging for most lenders, it said.

Further, restructuring trends have remained fairly limited for most lenders, at an average of 3-5 percent of AUM. Most NBFCs have given 60-180 days of principal moratorium, along with tenure extension for the restructured portfolio.

The brokerage believes that Reserve Bank of India (RBI) increasing its vigilance over NBFCs, restricting dividend payouts etc, will result in enhancing governance structures of NBFCs and bring more transparency and lesser leverage based growth -– leading to an improvement in cost of funds and credit costs.

Emkay Global continues to like promoter-backed, moat driven, well-governed NBFCs/HFCs with a stable liability franchise.

Cholamandalam Investment and Finance Company remains the brokerage's top pick with a 'Buy' rating and a target price of Rs 550 per share, followed by HDFC Ltd with 'Buy' rating and target price of Rs 3,020 per share and Shriram Transport Finance with TP of Rs 1,595 per share.

It also prefers PFC (BUY; TP of Rs 210) on the back of recoveries, Atmanirbhar disbursements and improving asset quality.

Emkay Global Financial Services remains watchful of Bajaj Finance's (Hold; TP Rs 5,400) growth trajectory and trends in the flexi loan book.

NBFCs face challenges amid soft interest rate regime

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