Non-banking financial companies (NBFCs) will focus on margins to build a healthy profile and absorb stress on their books, even if that means moderating the pace of credit growth, said top sector executives speaking at the Business Standard BFSI Insight Meeting.
Shriram Finance Executive Vice Chairman Umesh Revankar dwelt on the challenge of maintaining margins and said they are “sacred” for the companies.
Endorsing Revankar’s argument, Rakesh Singh, managing director and CEO of Aditya Birla Finance, said margins are important and NBFCs do not want to sacrifice them for growth. The customer is willing to pay extra if the financing company provides quality service and experience.
Rajiv Sabharwal, MD and CEO of Tata Capital, said that even though the cost of funds had increased over the past 12 to 18 months, his company had been able to maintain margins. It has managed to pass on the increase in cash costs to customers, he said
India Ratings in its review of the NBFC sector (October 2023) said it faces stiff competition in secured lending from banks and small finance banks, and this is the full pass-through of increases in financing costs in the second half could be reduced step by step. of FY24, compressing the margin by 20-25 basis points (on an annualized basis) in the financial year.
This has led NBFCs to venture into unsecured lending to protect margins where growth has been increased through partnerships with fintechs.
On margins, which have been impacted by the cost of funds, NBFCs have been advocating for the Reserve Bank of India (RBI) to take a more favorable stance on the ability to raise money.
Revankar of Shriram Finance, a deposit-taking company, said deposit mobilization depended on brand positioning – the reputation and service provided to customers over a period of time.
For his company, there is no asset-liability mismatch as the average loan maturity is 36 months, which corresponds to the average deposit maturity, which is also 36 months. The RBI should look more favorably at deposit taking, he added.
Sabharwal linked obligations to ratings, governance standards and the size of operations of financial companies. Many NBFCs with top ratings and governance standards have never faced any problem in raising funds even during the IL&FS and DHFL crises in recent years.
Advocating for NBFCs to tap customers for deposits, Singh said currently credit companies have taken a risk on customers through loans but the debts flowed to banks. If they come to NBFCs (as deposits), it will help in managing assets and liabilities, and liquidity, he added.
The RBI has not granted any new NBFC license with permission to take public deposits. After the merger of Housing Development Finance Corporation (HDFC), a deposit-taking company, with HDFC Bank, there are only 48 financial companies with permission to take deposits in the arena.
Referring to prospects of higher credit growth rates becoming a concern, NBFC top executives said the high growth in recent quarters had come after the pandemic phase, which had impacted demand. They agreed with the RBI on the need to be vigilant for high growth and signs of stress in the unsecured credit space.
On August 25, Reserve Bank of India Governor Shaktikanta Das had asked NBFCs and housing finance companies to remain alert to complacency in good times. The RBI identified risks associated with high credit growth in the retail segment, mostly unsecured.
Revankar said if the economy grows by 8 percent, credit will grow by over 20 percent. While NBFCs need to be cautious about high growth, margins on small loans are enough to act as a cushion. So far, they haven’t presented much of a challenge to his business.
The situation now and ten years ago is different. More information about customers is available and credit underwriting standards are now strict.
Credit growth of 25 percent in the past two years reflects pent-up demand after the pandemic. If you look at the last four to five years, the growth is around 15 percent, said Sabharwal.
Credit rating agency ICRA has said the unsecured loan segment, comprising personal and consumer loans, unsecured small business loans and microfinance loans, which drove growth last fiscal, would continue to support growth in 2023-2024. This segment is expected to grow by 26 to 28 percent this fiscal.