Lenders more bankable; NBFC growth expected to be slower for 6-12 months: CLSA

- Corporate stress loan formation should ease as a large part of stressed loans have been tagged as NPLs. But haircuts are likely to be higher (60-70 percent) than the current provisioning levels (50-55 percent), so credit costs can stay high.

- For NBFCs, immediate refinancing risks have largely been taken care of, but growth will remain subdued for the next 6-12 months as access to funding is limited and also costs have tightened. Their exposure to real estate is the key risk to watch out for.

- Festive season saw lower sales especially in auto segment partly on funding constraints faced by NBFCs.

Elaborating on banks, analysts at the firm wrote banks are finding the sweet spot of growth and credit quality.

It said that lenders were witnessing improving credit demand along with increased working capital demand (rise in commodity prices) and better competitive environment vs bonds and NBFCs.

“Banks highlighted that margins can improve aided by: (1) repricing of loans which happens with a lag under MCLR regime and (2) improved pricing environment after consolidation among NBFCs; in fact, banks have also increased fees on retail loans,” they wrote in their report.

The report also stated on how banks were confident of peaking asset quality concerns in the corporate segment as a large part of the stressed loans are already NPLs.

For NBFCs, CLSA expects slower growth over 6-12 months.

Most of the NBFCs have been able to rollover near-term refinancing through a combination of bank loans, sell-downs or commercial papers (CPs). It sees the next hurdle to be rollovers in the fourth quarter.

“However, growth will remain a challenge for this sector and we understand that at aggregate level credit, NBFC/HFC credit growth can moderate to 10-15 percent over the next 6-12 months after a 20 percent CAGR over the past two years.”

For NBFC/HFCs (housing finance companies), it is signaling caution on its exposures to real estate, which will be key to watch out for.

Speaking on stressed loans, while most of the stressed ones of banks have been recognized as NPLs, CLSA believes haircuts will be higher in this cycle.

Hence banks will need to lift coverage on NPLs (currently at 50-55 percent). Interestingly, the default of IL&FS can be a risk to pension funds as well which might be a sensitive issue to manage.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.