Non-banking financial companies primarily focusing on vehicle finance are diversifying their product mix to boost their assets under management and net interest margins by increasingly focusing on MSMEs, mortgage and personal loan segments.
According to Centrum Institutional Research, the net interest margin (NIM) of vehicle finance is expected to compress by around 20-60 basis points in FY24. “Historically, we have seen a negative correlation between interest rate hikes and demand. Given the underlying buoyancy in business and rising competitive intensity, we expect slower transmission of repo hikes by NBFCs, resulting in NIM compression,” said Centrum Institutional Research in a recent report.
This has forced Non-banking financial companies (NBFCs) to look at other avenues. Besides, lenders like Mahindra and Mahindra Financial Services (Mahindra Finance) are looking to increase the share of their high-yielding used-car portfolio to enhance margins.
Ramesh Iyer, vice-chairman and managing director of Mahindra Finance, explains, “If you look at our strategy, we are looking at MSMEs (micro, small and medium-sized enterprises), personal loans and pre-owned vehicles etc.”
In the fiscal 2022-23 (April-March), borrowing by SMEs and “other loans” accounted for 10% of Mahindra Finance’s business assets, up from 7% in 2021-22.
Similarly, loans against property, home loans, and new businesses rose to 37% of Cholamandalam Investment and Finance’s business assets in 2022-23 from 31% a year ago. This comes after the company recently expanded into consumer and small enterprises loans, as well as secured business and personal loans.
Y S Chakravarti, managing director and chief executive officer of Shriram Finance, said, “While used car loans and MSME loans would offer a good yield, we are not just diversifying for the sake of NIMs. We are focusing heavily on these segments as part of our overall expansion plan.”
NBFCs have seen strong growth in the assets under management (AUM) of vehicle loans in the past 12 months, thanks to the resilience of passenger and commercial vehicle sales.
However, analysts predict that auto sales will moderate in the current financial year due to a high base, waning pent-up demand and an increase in the total cost of ownership.
Further, lenders have experienced an increase in their cost of funds, with the Reserve Bank of India raising the repo rate by 250 basis points in this cycle. This has put pressure on the margins of these lenders.
Nevertheless, Centrum Institutional Research remains positive on the vehicle loan segment as the business diversification into high-demand segments like MSMEs will help boost their assets under management.
Additionally, higher disbursements in segments like used vehicles and unsecured personal loans will help offset some of this margin compression.
“We already have a diversified portfolio, both asset class-wise and geography-wise, and will continue this agenda,” says Rajiv C Lochan, managing director of Sundaram Finance. He adds, “We should expect NIMs to revert to pre-Covid long-term levels across the system. The Covid accommodation-aided NIM levels (a bonanza) are just not sustainable, in my view.”
