The Non-Banking Financial Companies (NBFCs) in India are expected to face burdens in their profit margins in the third quarter of December, 2024. The reasons for this is due to increasing liquidity issues and also a spike in cost of funds. Apart from this, both the NBFCs and microfinance firms have a large portion of unsecured loans. Due to a significant portion of unsecured loans, both of them are expected to face issues of late loan repayments.

NBFCs margins
The Elara Securities’ analyst, Shweta Daptardar states that the NBFCs are expected to record a fall of 13 basis points on a year-on-year basis in net interest margins (NIMs). Here, a single basis is about 0.01 in percentage point.

In the situation of increasing cost of funds, NBFCs are focusing more on diversification of liability. It will help the companies to spread out their financial risks. The third quarter of the current financial year is anticipated to observe the increasing burden on NIM and also high cost of managing loans.

The firms are trying to maintain their profitability through making provisions for potential losses due to delayed or non-payment of interest and principal amount. They are also focusing on enhancing operational efficiency of the company. Despite this, NBFCs are projected to record a fall in return on assets in the third quarter.

Further the brokerage firm Elara projected the growth of advances to fall to less than 18 percent on a year-on-year basis compared to the growth of 20 percent in the previous financial year. Elara also states that this weakening growth can possibly be observed in the NBFCs until the completion of the current financial year 2025. The reason for this is due to issues such as balance sheet risks, funding issues, and challenges occurring during changing business models.

Asset quality of NBFCs
Abhijit Tibrewal, an analyst of Motilal Oswal stated that the improvement of NBFCs’ loan quality projected in the second half of the current financial year will not be seen in the third quarter of the current financial year. As there was no big distress of decline, the quality of loans (assets) will either stabilize or fall slightly.

For microfinance firms, the cost of loans is anticipated to persist high and are further projected to rise high. The exception to high loan costs is only power and affordable housing finance companies. The loan cost is projected to rise high for vehicle financing firms and other diversified financing firms as well. The only exception in vehicle financing firms is Mahindra and Mahindra Finance.

Further the brokerage firm states that the net profit growth of its firms under coverage universe to be around 8 percent on a year-on-year basis. This growth is affected by factors such as persistent higher cost of loans, burden of weak NIM, and also pressures faced by microfinance firms in this third quarter again.

Many large NBFCs will start to announce their results from 20th January, 2024 onwards. L&T Finance is the first NBFC to announce its result.

Bunty Chawla, an analyst of IDBI Capital states that the expansion of credit book growth is expected to slow in the third quarter. The reason for this is weakening growth in auto financing. He further states that contraction in loan quality of both housing finance firms and NBFCs. The risk of stage 3 Assets ( loans repayment overdue more than 90 days) for housing finance and NBFCs is projected to be increasing by every quarter. It is because of lack of collection of loan payments and also adverse impact of unpredictable rainfall.

The retail NBFCs are anticipated to be affected by increased regulations, regional issues and also excessive structural leveraging. The major burden of NBFCs is located in retail credit which amounts to 35 percent of the total NBFC loans. In contrast to this, the micro finance only contributes to about 3.4 percent total credit and 9.6 percent of total retail advances. This situation is quite a matter of issue.

The third quarter is not only a quarter of worry due to high asset cost, the fourth quarter of this financial year is also expected to face issues. NBFCs’ non-performing assets in the third quarter is projected to surge by 6 basis points and hike in loan costs by 56 basis points on a year-on-year basis. The reason for this is ongoing difficulties in the industry. It is also due to the cautious approach taken by companies towards provisioning for potential losses. The reason for keeping more funds for potential losses is due to stricter rules of supervision.