Non-banking financial companies (NBFCs) witnessed a subdued growth in net profits in the December quarter due to higher provisioning. Moreover, the sector saw a moderation in the loan and disbursement growth due to the slowdown in unsecured lending, according to research reports. The loan growth across all layers of NBFCs was at around 12-14% for Q3 on a year-on-year basis.
Meanwhile, net interest margins were largely stable, despite liquidity tightening. Looking ahead, easing in the liquidity conditions and rate cut are expected to help credit growth.
According to RBI data, while the sector’s loan growth has slowed down to 6.5%, the credit growth slumped to 16% versus 22.1% a year ago.
With earmarking higher provisions for microfinance segment, Piramal Enterprises saw a muted profit in the December quarter. The NBFC made a loan loss provisions of Rs 648 crore, which was 2.5 times higher on a yearly basis. In the earnings call, Piramal Capital MD Jairam Sridharan said, “Very tough time, leading to a rise in delinquencies and credit cost for the segment. We probably have one more quarter of pain left.”
Similarly, L&T Finance’s consolidated net profit declined by 2% y-o-y to Rs 626 crore for the December quarter due to increase in provisions against the microfinance segment.
In the post-earnings call, Sudipta Roy, MD and CEO, L&T Finance, said, “Despite certain macro challenges within the microfinance sector, we have managed the situation effectively. We are hopeful that the environment will be much better over the next couple of quarters.”
To manage the challenging business environment in rural group loans (RGL) and the microfinance business (MFI), L&T Finance utilised Rs 100 crore from its macro-prudential provision corpus of Rs 975 crore, which was created during FY21 and FY22 in response to the Covid-19 pandemic.
Another factor that has weighed on NBFCs’ profits is the rise in cost of borrowing amidst tight liquidity conditions. Owing to a rise in borrowing cost, the net profit of Aditya Birla Capital fell 4% to Rs 708 crore in Q3FY25. Further, provisions were also increased 12% to Rs 388 crore.
On the asset quality front, shadow banks have registered significant improvement with some exceptions such as Shriram Finance. The company’s asset quality worsened in various segments, including commercial vehicles, construction equipment, gold loans and personal loans.
Analysts said that the asset under management of NBFCs has grown at a moderate rate of 14-15% and may grow at the same rate in FY26 as well.
The unsecured loans and microfinance segments, accounting for about 23% of the overall AUM of the industry, are expected to be impacted the most, said industry experts.
Anand Rathi Share and Stock Brokers said in its report that key risks such as macroeconomic shocks and relentless competition by banks could lead to less-than-expected yields.