Conference takeaways: From the horse’s mouth

26 Mar 2024 , 03:15 PM

Analysts of IIFL Securities hosted senior managements of CIFC, MMFS, SHFL, IIFL Finance, CREDAG, PNB HF, Aavas, Aptus, HFFC and MGFL at IIFL’s 15th Enterprising Bharat – Global Investors’ Conference. NBFCs, in general, expect growth to moderate off a high base in FY24 apart from conscious scale back of unsecured consumer loans given the AQ and regulatory concerns. Whereas, outlook on margins are likely to be driven by idiosyncratic factors. Even though managements guided for flattish to marginal reduction in credit costs near term, analysts of IIFL Securities expect it to inch up given the rising delinquencies in retail loans. Opex is expected to remain elevated with NBFCs continuing to invest in tech and geog/product expansion. Overall, analysts of IIFL Securities prefer large diversified NBFCs which are likely to deliver high double digit growth rates with healthy profitability (link) and remain constructive on CIFC, BAF, SHFL and Fusion. 

High growth to taper off: 

Large NBFCs were growing at 25-40% YoY in M9FY24 led by diversification (new segments) and distribution expansion (new geog or more products from same geog) apart from low base effect. However, NBFCs expect this high growth to taper off as: 1) base effect diminishes, 2) consolidation in the new segments and 3) conscious scale back of unsecured consumer loans given the AQ and regulatory concerns. However, NBFCs remain sanguine on growth prospects in segments such as MSME, LAP, and used vehicle. Consequently, CIFC/SHFL guided for growth to moderate from 40%/21% currently to 25%/15-16% over the medium term. Similarly for MMFS analysts of IIFL Securities anticipate growth to moderate to ~18% from 26%. Despite this growth moderation, they highlight that growth for some of the large diversified NBFCs is likely to be higher than their long term averages due to product and geog expansion. Housing finance players attributed recent weakness in growth to higher BT outs driven by competition and idiosyncratic factors like tech migrations. 

NIMs to be influenced by idiosyncratic factors at play wrt yields and COF: 

Margin outcomes for NBFCs would be a function of nature of loan book (fixed / floating) and extent of rate hikes already reflected on the book apart from COF trajectory. For most of the NBFCs, COF is likely to rise slightly with repricing still happening at higher rates (save for likes of SHFL) apart from rate hikes on bank borrowings (except for HFCs and MFIs). Analysts of IIFL Securities note that NBFCs have not been unable to fully pass on COF increase to borrowers in the rising interest rate cycle given high yield nature of lending apart from rising competition evident from increasing access to credit on back of geographical expansion by banks and large NBFCs. However, NIMs have likely bottomed out for NBFCs that have recently raised capital (endowment effect). Whereas, affordable HFCs expected some spread moderation in near term with rising competition from prime HFCs and large NBFCs apart from compression when the interest rate cycle turns. 

Opex to remain elevated on tech investments, geog expansion and new segment build out: 

NBFCs plan to continue tech investments for the next few years, recognizing the significance of data analytics in scaling up, sourcing, underwriting, and asset quality apart from enhancing long-term efficiency. Leveraging non-traditional data and analytics helps understand customers across income levels and regions, improving sourcing and underwriting. Similarly, most of the NBFCs are also expanding in new geographies and/or are also entering new product segments. These factors are likely to keep opex levels elevated in the near term, per the NBFCs. 

Cautious on rising delinquencies in unsecured loans: 

Though NBFCs attributed rising delinquencies in unsecured consumer loans to different factors, there was consensus on it being a cause of concern. Consequently, NBFCs would look to scale back their growth plans in the segment, atleast in the near term. Besides, NBFCs also highlighted higher delinquencies for loans sourced through Fintech partners and that they have discontinued a few partnerships. Within MFI, companies attributed rising delinquencies to state specific factors but guided for normalised credit costs settling at higher levels vs pre-pandemic. 

Strong growth in used vehicle financing to continue: 

With ~30% credit penetration in the used PV, the increasing formalization of used vehicle industry presents a significant opportunity for NBFCs. Consequently, NBFCs have tied up with online and offline used car dealers. In analysts of IIFL Securities interactions, all VF focussed NBFCs like CIFC, SHFL and MMFS indicated strong focus on used VF. 

Few players managed to crack affordable housing: 

Affordable HLs, though enjoys large unexplored market, it needs strong local geographical and customer knowledge. Also affordable housing has multiple sub-segments depending on customer profile, nature of security, yields and ATS with different players focussing on different sub-segments. Hence, scaling up in new geographies is a challenge for some of the established AHFCs. Whereas, NBFCs already having panIndia operations and ability to underwrite informal income of target customer segments such as CIFC have been able to scale rapidly by leveraging its VF branches, manpower and local know-how.