Better asset quality, rising AUM aided the profitability of non-banking finance companies (NBFCs) in the January-March quarter, said industry experts. While NBFCs reported an increase in net profit by over 20 percent, cost of funds showed a jump, they added. An analysis of financials of at least 10 NBFCs for the January-March quarter of FY24 showed a jump in net profit due to increase in assets under management (AUM), and improvement in the asset quality.
These NBFCs include Bajaj Finance, Shriram Finance, Aditya Birla Capital, PNB Housing Finance, Power Finance Corporation, among others.
“NBFCs witnessed margin pressures on account of the increase in the cost of funds; stable or lower provisions costs however resulted in the net profitability remaining stable vis-a-vis the last quarter,” said A M Karthik, Senior Vice President & Co-Group Head, Financial Sector Ratings, ICRA.
In the reporting quarter, a few large NBFCs (by assets) such as Bajaj Finance reported a 21 percent growth in consolidated profit after tax to Rs 3,825 crore in the fourth quarter of the financial year 2023-24 from Rs 3,158 crore in the year-ago period. Consolidated numbers include the businesses of the lender's subsidiaries, Bajaj Housing Finance and Bajaj Financial Securities.
Similarly, Shriram Finance reported a 48.73 percent on-year rise in profit after tax (PAT) at Rs 1,945.87 crore in fiscal fourth quarter. The company reported a net profit of Rs 1,308.31 crore in the year-ago period.
The net profit of L&T Finance grew 10.54 percent to Rs 553.88 crore in the fourth quarter of the financial year 2023-24. On a sequential basis, the net profit of L&T Finance fell 13.5 percent.
Sanjay Agarwal, Senior Director, Banking, Financial Services and Insurance, CareEdge, said the large driving factor for the profitability of the NBFCs is the growth that happened in the last 12 months.
Further, Power Finance Corporation has reported an 18.4 percent year-on-year jump in net profit to Rs 4,135 crore in the March quarter.
“This strong performance is backed by a 14 percent growth in our loan portfolio while retaining a strong asset quality,” Parminder Chopra, Chairperson and Managing Director, of Power Finance Corporation, said.
Also read: Banks report better-than-expected NIM in Q4 but asset quality a concern, say industry experts
Asset quality
Asset quality of most lenders in the January-March quarter have reported an improvement in their asset quality, with stage 3 loans coming down.
Chopra of Power Finance Corp said the company’s Net NPA levels reduced from 1.07 percent in the previous financial year to 0.85 percent currently. As per a release, gross NPA of the company stood at 3.02 percent as on March 31, as compared to 3.66 percent in a year ago period.
In the March quarter, Piramal Enterprises was also seen reporting a sharp improvement in the asset quality with gross NPA ratio falling to 2.4 percent, as compared to 3.8 percent in a year ago period.
Gross NPAs ratio of PNB Housing Finance stood at 1.50 percent as at the end of March quarter, as compared to 3.83 percent in a corresponding period last year. Similarly, net NPA ratio improved to 0.95 percent as on March 31, as compared to 2.76 percent in the year ago period.
“We will continue to work towards achieving best-in-class asset quality in the years to come,” said Girish Kousgi, MD & CEO of PNB Housing Finance said during an earnings call on April 29.
Analysts said that asset quality will witness some weakening. Karthik from ICRA said a 20-30 basis points (bps) increase in the gross stage 3 is expected in FY2025.
Also read: Loan write-offs by top 10 state-run banks fell to lowest in five fiscal years in FY24, shows data
Cost of funds
The borrowing cost or cost of funds for NBFCs has increased sharply in the fourth quarter of FY24, which analysts attributed to the increase in risk-weight norms by the Reserve Bank of India (RBI) last year.
CRISIL in its report said that the November 2023 regulatory action by the RBI to enhance risk weights by 25 percentage points on such exposures as well as on lending to higher-rated NBFCs could weigh on credit growth, especially unsecured consumer credit.
After that Moneycontrol reported that that NBFCs for the January-March quarter could reveal rising cost of funds, putting pressure on net interest margins (NIMs).
“The cost of borrowing for NBFCs has already increased 25-50 bps (basis points) over the last quarter of fiscal 2024. The increased cost of funds should result in some compression in net interest margins (NIMs),” ratings agency CRISIL said in a report.
The consolidated cost of funds of the India’s largest non-bank lender, Bajaj Finance increased by 70 bps in financial year 2023-24, to 7.74 percent, the company said in an investor presentation. In the previous financial year, cost of funds for the company stood at 7.04 percent.
Similarly, Umesh Revankar, Executive Vice Chairman of Shriram Finance, said during an interview with Moneycontrol said the company’s cost of funds increased 5 bps on a quarterly basis and 20 bps on a yearly basis.
Agarwal from CareEdge said cost of funds will remain slightly higher for the next couple of quarters and thereafter, we have to see how the market moves.
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