Demand revival to help NBFCs post best quarter in two years

Non-banking finance companies (NBFCs) may report their best quarterly performance in two years, riding on reviving consumer demand led by segments like home loans even as collection efficiencies are back to pre-Covid levels.

Some segments like microfinance continue to reel under high credit costs as the after-effects of the pandemic linger but others like vehicle finance will do much better due to healthy demand.

"Home loan companies are still the best placed with healthy margins and low credit costs," said Sreepal Doshi, analyst at Equirus Capital. "Microfinance companies will report a sharp spike in disbursements year-on-year because of a favourable base effect from the first quarter of last fiscal when disbursements had fallen sharply. However, credit costs will still remain elevated as borrowers continue to remain under pressure."


Microfinance loans overdue by over 30 days along with restructured loans are estimated to have declined 800 basis points to around 14% as of March 2022, after peaking at approximately 22% in September 2021, rating agency Crisil said. But it remains well above the pre-pandemic levels of 3%, Crisil said in May.

On the consumer finance side, Bajaj Finance is expected to record a net interest income (NII) growth of 41% with a 31% growth in assets under management, excluding the IPO financing business.

"Net interest margins are expected to stabilise with both consumer and mortgage book seen to be strong," ICICI Direct, the retail broking arm of ICICI Securities, said in a note. "IPO financing segment will not be material from Q1. Provisions may witness marginal uptick... profit after tax is estimated to increase 146% YoY and flat quarter to quarter."

Analysts said rising interest rates are unlikely to impact NBFCs immediately with the large ones having enough leeway to pass on the increased costs to customers. However, analysts will look for management commentary on the impact of rising rates on their business.

"The companies under our coverage have enough strength to pass on the higher rates to their customers. Except for credit quality challenges for microfinance companies and some growth challenges for gold loan companies, most NBFCs are in a sweet spot," Doshi from Equirus said.