NBFCs may report stable margins in Q1 on lower cost of funds, high-yield lending: Experts

NBFC margins

Non-banking finance companies will likely report stable net interest margins in the April-June quarter, backed by lower cost of funds and an improvement in business on high-yielding loans, experts said.

Net interest margin is the difference between interest income generated by NBFCs from borrowers and the amount of interest paid to their lenders.

The overall cost of funds for NBFCs fell after the Reserve Bank of India paused rate increases in April. The yield on government securities, especially the 10-year benchmark bond yield, eased more than 25 basis points (bps) between April and June and fell below 7 percent. One basis point is one-hundredth of a percentage point.

“Margins should stay stable as lending yields for NBFCs have been improving on account of higher yields in newer loans as well as an increasing mix of high-yielding product segments,” Emkay Global said in a research report on July 8.

Sadaf Sayeed, chief executive officer of Muthoot Microfin, said with credit growth bringing in economies of scale and asset quality improving, NBFCs would be able to easily maintain margins.

HP Singh, chairman and MD of Satin Creditcare Network, said backed by effective management of funding sources and the ability to pass on higher interest rates to borrowers.

Bajaj Finance said in its investor presentation for FY23 that there will be gradual moderation in margins in FY24 and there was no impact despite rate hikes by the RBI.

“Given strong ALM (asset-liability management) and diversified balance sheet profile, there was no impact of interest rate hikes on NIM in FY23. We expect gradual moderation in margins in FY24,” Bajaj Finance said in the presentation.

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The numbers

According to data compiled from Bloomberg and investor presentations of these companies, the net interest margins of NBFCs ranged from 3 to 15 percent at the end of FY23.

The data showed that the NIM of Aditya Birla Housing Finance stood at 5.08 percent and that of Aditya Birla Finance was 6.84 percent on March 31.

Manappuram Finance’s NIM was 13.16 percent and Mahindra & Mahindra Financial Services’ margin stood at 7.67 percent. Housing Development Finance Corp, which merged with HDFC Bank, achieved 3.6 percent at the end of FY23.

Asset quality

Experts do not see any risk on asset quality because the books of these entities improved after the stress of the pandemic. Sayeed of Muthoot Microfin said the repayment rate of microfinance industries was 99 percent during April-June.

Singh said there are no potential signs of asset quality stress in the first quarter of this financial year as credit costs are expected to decline in FY24 with continued improvement in asset quality indicators, driven by recoveries and write-offs.

CareEdge report said the gross non-performing asset ratio contracted to 5.8 percent of total advances in March from 10.5 percent in September 2022. However, there was an increase in restructuring of loans to large borrowers between September 2022 and March 2023. Public sector NBFCs reported a lower GNPA ratio of 2.8 percent compared to 5.5 percent for their private sector counterparts.

Also read: Securitisation loan volume surges 60% in Apr-June quarter: Crisil

Borrowing from banks

The reliance on bank funding increased in FY23 due to the higher cost of funds for NBFCs in the money market. Bank lending to NBFCs constituted 41.2 percent of total borrowings in March 2023 as against 39.6 percent in March 2022 and 37.6 percent in the year before, according to RBI data. At the end of March 2020, the ratio was 35.6 percent.

Experts said this trend may continue and NBFCs may turn to the money market when borrowing costs ease.

“This shift would depend on factors such as the entity's credit rating, market conditions, and access to capital markets,” Singh said.