Stage 3 loans of NBFCs decline sharply in one year, signalling better asset quality

As per a Moneycontrol analysis, gross Stage 3 loans of leading NBFCs ranged between three percent and six percent compared to the four to eight percent a year ago, and net Stage 3 loans were in the range of 0.5-4 percent compared to 0.90-3 percent in the year ago period.

Major Non-Banking Finance Companies (NBFC) have seen an decline in Stage 3 loans, or loans that are overdue 90 days in the last one year, which experts attributed to a pick-up in economic conditions on the ground.

As per a Moneycontrol analysis, gross Stage 3 loans of leading NBFCs ranged between three percent and six percent compared to the four to eight percent a year ago, and net Stage 3 loans were in the range of 0.5-4 percent compared to 0.90-3 percent in the year ago period.

As the NBFCs follow the Indian Accounting Standard (IND AS), they have to classify bad loans in three categories or stages, Stage-1 which consists of loans overdue by up to 30 days, Stage-2 where loans are overdue by 31-89 days, and Stage-3 where loans are overdue for more than 90 days.

NBFCs need to make provisions according to the category of the loan. “This decline could include better economic conditions leading to improved repayment capabilities of borrowers, effective collection and recovery efforts by NBFCs, and possibly write-offs of some of the bad loans,” said Nitin Purswani - CEO at Medius AI.

Adding to this, Sanjay Agarwal, Senior Director, CareEdge Ratings, said normalcy in the economic activity has increased the repayment ability of the borrowers and from here on the number of Stage 3 loans will likely remain in this range.

In the June Financial Stability Report, the Reserve Bank of India (RBI) said that the NBFC sector has witnessed a marked improvement across major soundness parameters, viz., asset quality, capital levels and liquidity. Capital levels rose, with the Capital to Risk Weighted Assets Ratio (CRAR) increasing from 26.0 per cent to 27.5 per cent between September 2022 and March 2023.

The central bank further said the gross non-performing assets ratio of the NBFCs fell sharply from 5.4 per cent in September 2022 to 3.8 per cent in March 2023. Special Mention Accounts (SMAs), which are more vulnerable to slippage, have also contracted from 10.5 per cent of total advances in September 2022 to 5.8 per cent in March 2023.

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What do numbers say?

The gross Stage 3 assets of Shriram Finance has seen a sharp improvement in the last four to five quarters, with numbers falling to 5.79 percent in Q2FY24, from 6.27 percent in Q1FY23, as per the company’s investor presentation.

Similarly, L&T Finance also witnessed the similar trend of declining bad loans to 3.05 percent in the second quarter of the current financial year, from 3.61 percent in the Q1FY23.

LIC Housing Finance and Cholamandalam Investment and Finance Company have also seen improvement in their bad loans, with gross Stage 3 assets standing at 4.33 percent and 2.96 percent, respectively in the July-September quarter.

Mahindra & Mahindra Financial Services witnessed a fall in Stage 3 loans to 4.29 percent in Q2FY2, as compared to 8.03 percent in Q1FY23, the presentation showed.

Will NBFCs increase lending?

Most analysts believe that the decline in the Stage 3 loans indicates the lower stress in the books of these entities and this can push them to lend more in the coming quarters.

Analysts attribute this improvement to an overall pick up in the economic situation on the ground. Additionally, lower NPAs can enhance the confidence of investors and creditors in the NBFCs, potentially leading to increased funding access for these institutions, thereby allowing them to extend more loans, Purswani said.

The festive season will also give a push to the lending activity for these entities, analysts added.

Also read: Will keep NBFC separate from core business, says Pidilite MD Bharat Puri

Q2FY24 profitability

In the second quarter of the current financial year, most NBFC have witnessed a healthy growth in their net profits on the back of rising net interest income and improvement in asset quality.

As per their investor presentations, profits of the top NBFCs have grown in the range of 12-50 percent. Whereas, net interest income of these entities have grown 18-83 percent.

In the reporting quarter, net profit of Bajaj Finance rose 26 percent on-year to Rs 3,106 crore and that of Mahindra & Mahindra Financial Services grew 48 percent on-year to Rs 235 crore.

Similarly, LIC Housing Finance’s net profit rose exponentially higher to Rs 1,188.05 crore in Q2FY24, as compared to Rs 304.97 crore in a similar period last year.

In the July-September quarter, the assets under management of the NBFCs have also seen sharp growth ranging between 15-50 percent. One the other hand, the asset quality of these entities have also improved. Agarwal from CareEdge said that there is further scope for the improvement of asset quality, but that decline would be marginal.