PremiumThe June-quarter performance of non-banking financial companies (NBFCs) would have a lot of fireworks or dying embers, depending on which period investors pick to compare the results with.
Year-on-year (y-o-y) metrics may show a sharp increase because the first quarter of last year saw severe contraction following a strict nationwide lockdown to contain the spread of coronavirus. Lenders had reported a sharp contraction of their loan book as well as a spike in defaults last year.
Given the low base, most lenders may report double-digit loan growth this year compared with last year. Investors should ignore this optical relief and instead focus on the sequential performance of lenders. Here, the first quarter of FY22 could turn out to be the ugliest for NBFCs, with a sharp fall in disbursements and a hit on asset quality.
However, lenders may see a steady improvement in subsequent quarters, according to analysts. Analysts expect lenders who have a large retail book to be hit the most and microfinance lenders to be particularly vulnerable.
“We expect disbursement to decline sharply quarter-on-quarter as a result of seasonal weakness in 1Q and lockdown/challenges in disbursement because of the severe covid wave, especially in the first two months of the quarter," a report from Kotak Institutional Equities said.
Bajaj Finance’s better-than-expected assets under management (AUM) growth has, however, allayed some concerns.
A surge in covid infections led to most states imposing restrictions on mobility and economic activity between April and May. The recovery in disbursements seen during the third and fourth quarters of FY21 has now stalled.
June witnessed a recovery as these restrictions were relaxed, but analysts believe the performance of the quarter would be sober. The disbursement hit is likely to be the least for housing finance companies as pent-up real estate demand has ensured home sales growth. The worst-hit has been consumer loans with discretionary spending weighed down by not just restrictions but also a bleak outlook on income and employment.
The sequential hit on growth could also affect bad loan ratios. As such, stress is expected to have increased for all lenders because of the second wave. Most lenders are expected to report an increase in slippages.
Lenders that depend on physical collections for a large part of their borrowers, such as microfinance companies, may report lower collections and, therefore, higher defaults.
Collection efficiencies have fallen 10-35% in April and May compared with March for all lenders, including banks, analysts at ICICI Securities Ltd note. Small finance banks such as AU Small Finance Bank and Equitas Small Finance Bank have reported a sharp drop in collections in early updates. This shows that even microfinance firms may report a similar fall in collections and rise in defaults. Thus, provisioning requirements may increase and weigh on profits. Vehicle loans may also show a rise in defaults, according to analysts.
The absence of forbearance may also result in lenders going for more restructuring of loans.
“Provisions for restructured loans will likely remain high. There is no regulatory requirement of higher provisions on such loans, but most NBFCs are classifying such loans under gross stage-2 and marking a higher buffer," analysts at Kotak wrote in the note.
The upshot is that NBFCs may have a bigger challenge in maintaining asset quality than getting growth.
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