By DK Aggarwal
Non-banking financial companies (NBFCs) have undergone a significant transformation over the past few years. The sector has managed to witness robust credit growth in past few years and has been clear outperformers in last three years on the back of the fading effects of RERA, higher growth in loan books and improvement in spreads between borrowing and lending rates.
According to RBIs recent financial stability report, aggregate balance sheet size of the NBFC sector was Rs 22.1 lakh crore as of March 2018 and borrowings grew at 19.1 per cent during FY17-18, loans and advances increased 21.2 per cent and investments increased 13.4 per cent.
Asset quality and capital adequacy of NBFC have also improved during FY17-18. For instance, GNPAs as a percentage of total advances decreased from 6.1 per cent in 2016-17 to 5.8 per cent in 2017-18 and CRAR (capital to risk-weighted asset ratio) increased from 22.0 per cent in 2016-17 to 22.9 per cent in 2017-18.
As per extant guidelines, NBFCs are required to maintain a minimum capital level consisting of tier-I and tier-II capital, of not less than 15 per cent of their aggregate risk-weighted assets.
After the recent dream run in the sector, the billion dollar question is – will the rally continue in these stocks, most of which have already given stellar returns?
NBFCs have emerged as important financial intermediaries, particularly for the small-scale and retail sectors, underserved areas and unbanked sectors and it is expected that this will continue to present a big growth opportunity in the days to come.
Also, PSU banks working on cleaning up their balance sheets have been losing out to NBFCs in incremental loan disbursals. The governments increased thrust on infrastructure and rural sectors will aid growth and is expected to give a fillip to the NBFC companies engaged in infrastructure financing.
The sector looks promising with strong signs of revival in the commercial vehicles market. Also, regulatory restrictions on overloading of vehicles and phasing out of old diesel vehicles will cut demand for commercial vehicles (CVs). Smothered demand post GST and a pickup in construction and mining activities would also continue to drive demand. Higher income, lower penetration and lower cost of capital will also boost long-term demand.
Moreover, the sector will see growth due to projected improvement in vehicle penetration by 35 per cent in next five years (20 vehicles per 1,000 to 27 vehicles per 1,000 population). Capacity utilisation of the passenger vehicle industry has increased to 77 per cent in FY17-18 from 68 per cent in FY15-16 and is expected to continue rising. GST rollout and its boost to the logistics sector is expected to aid growth in the medium term.
This sector has witnessed diverse investment structures ranging from strategic investments, private equity investments to debt funding through the NBFC route. With rising innovation and growth in the sector, newer business models such as account aggregators and P2P Lending are speeding up. The sector has been benefitting from the lower interest rate regime and a massive growth in underpenetrated sectors, where the reach of banks was limited.
To note, banks funding to NBFCs increased 27 per cent during FY2018, while the banking systems credit growth remained muted at 8 per cent for the period.
The sector plays a critical role in the core development of infrastructure, transport, employment generation, wealth creation opportunities and financial support for the economically weaker sections. Besides, the sector also makes a huge contribution to the state exchequer.
The reach of NBFCs, along with their strong understanding of the market, is expected to help position them as a better alternative to the traditional ways of banking going forward.
Moreover, it is to be supported by growing urban population, demand from schools and corporate and increased inter-city travel. Some of the NBFCs such as HDFC (mortgage loans), Mahindra Finance (agri finance), Power Finance Corporation (power finance) & Shriram Transport Finance (pre-owned commercial vehicle finance) have established presence in specialised segments.
Undoubtedly, all these companies are well capitalised to grow and capture the emerging opportunity in this space. Given the expected credit growth, the huge opportunity in India and in niche business verticals, investors with a long-term perspective may accumulate stocks from the space.
To name a few, LIC Housing Finance, HDFC, Bajaj Finserve, Indiabulls Housing Finance, L&T Finance Holdings, Shriram Transport, Bajaj Holding, M&M Financial Service, Edelweiss Finance and GRUH Finance have been some of the leading growth drivers in this sector.