Housing finance companies: HFCs expected to post strong loan growth in Q3, other NBFCs may have a harder time

Mumbai: Non-Banking Financial Companies (NBFCs) are expected to post mixed results in the December quarter overall, analysts say.

Home finance companies (HFCs) are expected to post strong loan growth, driven by housing demand, while earnings from vehicle finance companies are expected to be subdued due to slow passenger vehicle sales. Microfinance companies, on the other hand, will be hit by slower collection efficiency, they said.

HFCs, led by HDFC, will continue to outperform as robust loan growth was also supported by improved collection efficiency, analysts said. However, microfinance will continue to face challenges. “Microfinance collection efficiency has been volatile and is likely to be affected due to a resurgence of Covid-19 infections. Some lenders may choose to cancel some old loans during the quarter, which could impact provisions,” said Shreepal Doshi, an analyst at Equirus Securities.

Vehicle finance companies could be hit by weak sales as business volumes in passenger vehicles were hit by chip shortages in the third quarter. “Although medium and heavy commercial volumes have recovered, lenders expect a strong improvement from FY23. Used commercial vehicle disbursements remained at similar levels to the second quarter. Demand for commercial vehicles has improved, but is still far from pre-19 levels,” Motilal Oswal analysts said in a briefing note. With HFCs, Motilal Oswal expects a strong recovery in consumer lending, in line with the recovery in economic activity. He expects Bajaj Finance’s new loan bookings to increase 13% in the quarter, with a reduction in excess liquidity and no significant cancellation of interest income contributing to margins.

Kotak Institutional Equities expects disbursements to be strong for most housing finance companies in the quarter ended Dec. 31, despite weak overall volumes during the holiday season.

Gold lenders are expected to report strong assets under management due to increased footfall, better promotions and high gold prices.

However, even though recoveries have improved due to the easing of restrictions, analysts will remain alert to any impact of stricter asset recognition standards for NBFCs. In November, the Reserve Bank of India instructed NBFCs to move to a daily classification of NPAs from the month-end classification followed by many NBFCs.

Additionally, accounts cannot be upgraded to standard unless dues are fully recovered. These changes bring the asset classification rules of NBFCs in line with those of banks and are likely to increase the non-performing assets (NPA) of these entities.

The central bank also announced new standards for stricter supervision of NBFCs under which these entities will face restrictions on activities if certain parameters such as NPAs and capital adequacy are breached.

These standards will be effective from October 2022 and NBFCs will need to prepare to implement them.

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