STOCKWATCH. NBFCs: Bad loan norms, economic slowdown take a toll

With banking stocks falling out of favour with investors, NBFCs have been in focus over the last two-three years.

Increased competencies in market segments that are usually under-served by banks — such as the non-salaried category, low-income households, small businesses and rural areas — have helped NBFCs grow faster than traditional banks.

However, in the past year, barring a few stocks such as Bajaj Finance, Can Fin Homes and SKS Microfinance, which continued their good run, most stocks fell along with the broader market. The RBI’s regulatory changes for NBFCs that came in about a year or so ago, have impacted the profitability of a few players.

NBFCs now have to recognise bad loans earlier and increase their provision on such loans. Besides, some players have also been feeling the heat of the overall slowdown in the economy.

Take for instance, Mahindra and Mahindra Financial Services. Slowing loan growth and deteriorating asset quality have dragged the company’s performance over the last couple of quarters. In the December quarter, its net profit plunged 51 per cent owing to a fall in margins and a sharp deterioration in asset quality.

Weakness in the rural economy and migration to the new NPA recognition norms have increased the stress on asset quality. Bad loans are now 10.1 per cent of total loans. The last time bad loans were at this level was in December 2008. The company currently follows a 135-day norm. The RBI requires NBFCs to recognise bad loans at a 90-day cut-off by March 2018 (180 days earlier). This will be implemented in a phased manner, moving to 150 days cut-off by the end of March 2016 and 120 days by the end of March 2017.

Shriram Transport Finance, a leading player in the pre-owned commercial vehicles segment, too, has been weighed down by the economic slowdown. While the company’s core performance in the December quarter has been healthy, rising bad loans are a concern. The company still follows the 180-day norm and will move to the 150-day cut-off in the March quarter.

This will add to its bad loan provisioning significantly.

Brighter side On the brighter side, however, some players continue to grow at a healthy clip and are better placed to tide over the new regulatory norms. Bajaj Finance, for instance, continues to deliver healthy traction in loans driven by strong growth in its consumer finance business. In the December quarter, it reported a 58 per cent growth in profit on the back of strong loan growth and good asset quality. While the company follows a 150-day norm for classification of loans as NPAs, its provisioning is done on a 90-day cut-off.

Market leader HDFC continues to witness steady growth in its retail loans. The company has also managed to keep its loan delinquency at low levels. However, the overall growth in the housing finance space slowing in the last couple of quarters has weighed on the stock’s performance.

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