Lower fund costs to lift NBFC margins, MSME stress stays

Mumbai: Non-banking finance companies (NBFCs) are expected to benefit from a lower cost of funds in the second quarter, but purchase deferrals timed to GST cuts toward the quarter end and sporadic asset quality stress could weigh on earnings.

Exposure to micro finance and micro and small and medium enterprises (MSEMs), which dented even mainstream lenders' earnings in the past, remains under the lens this quarter, too, as the unorganised sector emerges from demand stagnation.

Prabhudas Lilladher Capital analysts Shreya Khandelwal and Dhanik Hegde expect NBFC net interest margins (NIMs) to improve by between 10 and 20 basis points in the second quarter on lower funding costs.


"We expect the benefit of accelerated repo rate cuts to be visible in the second quarter with a lower cost of borrowing. About 50% of Cholamandalam Investment & Finance's bank borrowings are linked to the external benchmark rate which are expected to reprice in the second quarter. Shriram Finance expects about a 20 bps reduction in cost of funds (CoF) in the current fiscal as incremental CoF has started to come down," Khandelwal and Hegde said.

NIM benefit will be across the sector with consumer loans giant Bajaj Finance benefiting from lower interest rates improving NIM by about 10 bps in the fiscal. Though negative carry on excess liquidity could offset benefits from lower margins, Prabhudas Lilladher said.

Slow Starters
Delayed consumption and volume push due to the GST cut announcement in the last quarter will impact growth, especially for vehicle financiers. "Demand elasticity to price cuts likely to be seen in passenger vehicle, tractors and two- wheeler segments; while demand sentiment is unlikely to receive any fillip in light commercial vehicles, medium and heavy commercial vehicles and commercial equipment segments...Our assessment is of Chola reporting a marginal year on year growth in its vehicle finance disbursements in second quarter, Mahindra & Mahindra Finance reporting a mild decline and Shriram reporting a moderate growth," Rajiv Mehta, lead analyst at Yes Securities Institutional Equities said in a note.

Vehicle financiers will also have to deal with a deteriorating delinquency matrix due to unimproved infra and industrial activity, intense rains, and incremental headwinds posted by tariff uncertainty and GST pause, Yes Securities said.

The strong rally in gold price, lower loan to value ratios and improvement in gold loan demand make the growth environment conducive for gold loan financiers like Muthoot and Manappuram.

Yes Securities expects gold portfolio to grow 8% to 10% versus the first quarter without any material change in growth of active customer base.

Analysts expect stress in the MSME portfolio to be felt this quarter with large financiers of the segment like Cholamandalam and Bajaj Finance being impacted, leading to higher credit costs during the quarter.

"While the GST cut distorted monthly trends, overall disbursements for most companies likely remain in high-single/low-double digits, similar to the first quarter. We expect asset-quality trends to be stable, with elevated stress continuing in small MSME loans," Kotak Institutional Equities said in a note.