Recent regulatory crackdowns that some of the NBFCs have witnessed are viewed as pre-emptive moves by experts. Kaitav Shah, Lead BFSI Analyst, Anand Rathi Institutional Equities, said that it is a pre-emptive action, perceived as good, and does not signal a systemic risk. Further, the administering body is taking action wherever there are compliance gaps. 

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Nevertheless, while fundamentals seem to improve at NBFCs, there is a borrowing cost overhang too after the RBI’s risk-weighted asset measure that it recently resorted to. 

What are the changes introduced by the RBI?

The apex banker said that henceforth, exposure to consumer credit by banks and NBFCs will attract a risk weight of 125 per cent as against 100 per cent earlier, while the weight for credit card financing is fixed at 125 per cent as against 100 per cent.  So, this, in turn, implies that the increase in risk weight would lead to a higher capital requirement against the given exposure and, consequently, a lower capital adequacy ratio (CAR). 
Nonetheless, despite the action, a report by CareEdge Ratings released on January 19, 2024, said that the capital position of NBFCs as measured by capital to risk-weighted assets ratio (CRAR) remained healthy, with CRAR at 27.6 per cent in September 2023, significantly above the regulatory minimum requirement of 15 per cent. 

NBFCs fundamentals taking into account the recent Q3 show

Across all the segments, NBFCs have been reportedly logging robust growth in assets under management, primarily driven by healthy traction given the festive season offtake. The Deven Choksey report underpinned that the NBFC industry during the December ended quarter registered average AUM growth of 39.8 per cent on year, led by Poonawalla Fincorp.
Furthermore, given the healthy product pipeline, a customer-centric focus, and the enhancement of digital initiatives, management across these companies is confident of sustaining AUM growth till FY25E, added the report.

Decent operating performance and stringent curbs over credit costs led to healthy earnings growth across players in the segment. The overall earnings growth remained healthy across all the players, led by decent operating performance and tightened control over credit costs. Furthermore, while net interest margins (NIMs) during the quarter under review stood largely steady sequentially, the NBFCs expect margins to improve. Besides, the sector reported a sequential improvement in asset quality owing to writebacks and controlled credit costs in Q3FY24, according to the Deven Choksey report.

Outlook for NBFCs in the short to medium term

So, now that the cost of funds for NBFCs continues to be high as the benefit of the declining interest rate cycle is still some time away and given the new risk-weighted norm, net interest, margin stabilisation as well as expansion will be further delayed, as noted by Motilal Oswal Financial Services in its recent report dated March 1, 2024. Shah maintains that though the sector will see growth at a good pace, margins are expected to remain soft for NBFCs.

“Currently, NBFCs are facing regulatory actions looking at the instances at Bajaj Finance followed by Paytm, and recently on IIFL Finance and JM Financials.  More such instances are expected to create overhang on the NBFC sector,” iterates Rahul Malani, Research Analyst, Sharekhan by BNP Paribas. In terms of key business parameters, Malani sees loan growth to moderate on a high base and lower growth in selected segments, but overall it is expected to remain healthy. 

Overall, the asset-quality outlook remains stable, but asset quality normalization has started to happen in selected segments (Personal loans and MFI segment). "We continue to remain selective and our top preferred picks are Cholamandalam Investment and Finance, Bajaj Finance, LIC HF, Can Fin Homes and L&T Finance Holdings in NBFC and HFC space," the expert added.