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NBFC recovery to bring higher Q4 profits; funding costs to rise, too

Non-bank lenders are likely to match India’s mainstream banks in reporting better quarterly performances due to the receding impact of Covid shutdowns on collections and asset quality, although stricter provisioning norms ordered by the banking regulator could crimp margin expansion at the last-mile financiers of homes and cars.

Motilal Oswal expects NBFCs under its coverage to report a year-on-year net profit growth of 32% led by Bajaj Finance, Cholamandalam Investment and Finance, L&T Finance and LIC Housing Finance (LICHF). It expects higher credit costs to hurt Mahindra & Mahindra Financial Services, which could impact its earnings.

“Collection efficiency has now normalised and even restructured accounts have selectively started repayments. Disbursement momentum is likely to be healthy in 4QFY22 but quite unlike the seasonally stronger 4Q that is typically expected for vehicle financiers. Momentum for housing financiers has been robust and we expect this buoyancy to sustain even in FY23,” Motilal Oswal said in a preview note.

Analysts see a clear demarcation among NBFCs with the top-rated ones like Bajaj Finance and Cholamandalam better placed compared to the rest of the market because of their easier access to funds, higher provisions and domination of main lines of business.

“The consumer-facing NBFCs are clearly ahead because even if the cost of funds rises a 50 basis points pass on to their customers will not make any difference like in the case of maybe vehicle finance companies. Retail-oriented NBFCs are better placed and will continue to do well helped by growth in business volumes and better pricing power,” said Siddharth Purohit, principal advisor, InvesQ Investment advisors.

Another brokerage Prabhudas Lilladher expects housing finance companies to record a credit offtake of 12.9% year-on-year led by a more than 20% growth in mid-sized housing finance companies. “HDFC and LICHF might see continued momentum in credit offtake mainly led by individual housing while higher volumes might lead to more other opex (operating expenditure) impacting net profit. Asset quality might be stable quarter on quarter. Canfin and Aavas might see a sequential improvement in earnings mainly led by better disbursals and reduction in credit costs,” the brokerage said.

Last year, the RBI said that NBFCs can upgrade bad loans to standard assets only after all interest dues and principal outstanding are repaid, tightening norms that had allowed NBFCs from classifying loans as standard even if part payments were received. The rules which were supposed to be effective from April 1 were subsequently relaxed to be effective from September 1, 2022. All large NBFCs have already started making provisions to adjust to the new regulations.

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