Will a slow but steady Q2 turn things around for NBFCs?

The second-quarter numbers of India Inc were softer for the financial year 2020, confirming the ongoing economic slowdown.

Banks reported weak loan growth, stable-to-declining nonperforming loans (NPLs) and stable slippages and high provision coverage ratio.

However, most non-banking financial companies (NBFCs) had a decent quarter amid a challenging environment as they reported steady net interest margins (NIMs) despite an increase in borrowing costs, said Kotak Institutional Equities.

So, are we looking at a turnaround for NBFCs?

Experts and brokerages agree that the health of NBFCs will improve, supported by the government's measures, but it will take time.

"Signs of stress in the economy are still strong, so it will be too early to say that NBFCs will see a turnaround quickly. But in six months' time, the situation will improve. More measures by the government will be a major boost," said G Chokkalingam, Founder, Equinomics Research & Advisory.

The RBI's frameworks for the asset-liability management (ALM), liquidity coverage ratio (LCR) requirement and capital adequacy requirements (CAR) for NBFCs along with several other steps may increase the confidence of lenders to lend to the better quality NBFCs, brokerages said.

The government has announced a slew of measures for the real estate sector and housing finance companies, which may result in higher demand for the residential sector and improved liquidity for HFCs.

Kotak Institutional Equities, however,  said it was concerned about the weak demand for high-end residential real estate, cash flow and solvency of certain developers, which could affect HFCs.

Sanjiv Bhasin, Director at IIFL Securities, is positive on the sector and expects a shift in the lending preferences of NBFCs.

"Rather than the MSME sector, I think their preference will be now lending to the retail sector which should bode well for their businesses going forward," said Bhasin.

He said that the government's steps will help NBFCs regain most of their mojo. Among the sector, he is bullish on L&T Finance Holdings, Mahindra & Mahindra Financial Services and LIC Housing, where the parent companies are strong.

"We have already seen select largecaps, such as Bajaj Finance, doing extremely well as they gain market share," said Bhasin.

“In the midcaps, we are bullish on LIC Housing as the second-largest mortgage lender. Apart from Bajaj Finance and HDFC, L&T Finance Holdings, Mahindra & Mahindra Financial Services and LIC Housing should stand out," Bhasin said.