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Non-banking finance companies (NBFCs) are facing tough times. Rising number of bad loans are pushing up provisioning costs, while the hike in interest rates has also been a dampener.

NBFCs cannot pass on interest costs immediately to customers because their loan books are based on fixed rates, while borrowing costs are linked to market rates. Due to this asset liability mismatch, borrowing costs increase first and the pass on to customers happens later. However, according to experts, the situation is not all that grim.

The maximum pressure will be on auto loans as they are fixed rate loans with tenures varying from three to seven years. Large ticket consumer durable loans, with tenures of one to three years, will be next in line.

In the housing finance segment, where loan tenures can go up to 30 years, the impact will be limited due to the use of floating rates, wherein loan interest rates move up or down depending on market rates.

Another reason for the mild impact would be that interest rate reset happens only periodically.

For most floating rate housing loans, interest rate reset usually happens annually.

Valuations are reasonable in housing finance, gold and infra loans
These segments have been less affected by margin pressures, unlike the auto loans and large ticket consumer durable loans segments.


Can Fin Homes
There is shortage of supply of affordable homes and this is creating business opportunities for players like Can Fin.

The company is now concentrating on higher yielding builder loan book, with a specific focus on builders selling units in the LIG and MIG-I category. Most new branches are opening in tier 2 cities, where there is less competition from banks.

Its effort for geographical diversification is also yielding fruit.

LIC Housing Finance
It has an unparalleled distribution network and will be a key beneficiary of the growth expected in the housing finance space. Though its NIM contracted in the first quarter of 2018-19, experts feel that this is a temporary blip. “Recent prime lending rate (PLR) increases will cushion margins of LIC Housing from here on.

A higher share of commercial papers, greater focus on garnering retail deposits and possible external commercial borrowing will provide further support. Improving margins coupled with better asset quality will boost profitability”, says a recent HDFC Securities report.
PFC
This Navratna CPSE is one of the leading NBFCs in India. It is a dominant player in the power finance business, where the risk is relatively low. This is because 82% of its total loan book of Rs 278,000 crore is in the government sector and therefore, free from asset quality concerns. Though it faces asset quality issues from lendings to the private sector, slow revival in power sector should reduce concerns

REC
While the NIM margin pressure continues for the company, there is no let up on the growth front and REC reported 16% y-o-y loan growth in the first quarter of 2018-19. Due to continued government push, disbursements are expected to improve further in the second quarter.

Muthoot Finance
With 43% y-o-y net profit growth, Muthoot Finance continues to do well. In addition to overall improvement in the gold loan business, marketing initiatives like hiring Amitabh Bachchan as brand ambassador are also yielding results. Though at a nascent stage, only 10% of its AUM, its non gold loan business is also picking up. More importantly, the management has started taking pro-active actions based on market conditions.

Manappuram Finance
Manappuram Finance reported 24% y-o-y AUM growth during the first quarter of 2018-19. While the gold loan segment grew by 16%, additional boost came due to faster growth in non-gold segments. With a good asset quality- gross and net NPA of 0.7% and .04%- Manappuram continues to be on a strong wicket. More importantly, plans to realign its long tenure gold loans into several shorter duration products will help it to reduce interest rate risk and also provide insulation from gold commodity prices.