Due to the two recent developments, the business environment will be beneficial to non-bank financial companies (NBFCs).
On February 25, the Reserve Bank of India (RBI) simplified the risk weighting norm for bank loans to NBFC, reducing it from 125% to 100% from April 1. This move should reduce banks’ requirements for such loans, thereby freeing up more NBFC funds. The measure comes after a 25-base point (BPS) buyback rate lowered on February 7 and is expected to ease investors’ attention to system growth.
Lower interest rate cycles benefit relative to bank interests because it erodes the bank’s cost advantage from low-cost current and savings account (CASA) deposits, allowing NBFC to compete more effectively.
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Potential beneficiaries in the listing NBFC will be M&M Financial Services Ltd and Cholamandalam Investment and Finance Co. Ltd. Their funds from banks have accounted for 45%-50% of their total borrowings since the last four quarters to Q3fy25.
For competitors, Bajaj Finance Ltd and Shriram Finance Ltd are lower. Here, investors will monitor closely if these companies will retain lower capital costs or at least partially transfer to their customers.
However, banks’ credit utilization is not just the cost of funds, but their loan books are also crucial for NBFCs. As of December, as of a year ago, the growth rate of bank loans to NBFC was almost reduced to 6.7 per cent, according to the Reserve Bank of India. This sharp contraction is the result of RBI’s increased bank loan risk weights to NBFC in November 2023, a regulation designed to curb the rapid growth of unsecured consumer credibility.
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The RBI steps can solve the borrowing cost problem across the industry. However, addressing company-specific issues such as asset quality and the associated credit costs will continue to shape NBFC’s revenue and valuation.
For example, M&M Financial’s asset quality in Q3FY25 continued to deteriorate as the percentage of total loans for net phase 3 loans was 2%, respectively, depending on 41bps and 48bps, respectively.
For Cholamandalam, this parameter increased by 6bps in Q3FY25, 1.66% year-on-year. In fact, even though Cholamandalam shares offer a 30% return, M&M Financial’s share price fell 3% last year.
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According to Mirae Asset Sharekhan’s estimate, M&M Financial’s relative valuation trades much lower, while Cholamandalam’s comparison is 1.6 times and P/BV trades at 1.6 times. The latter’s premium valuation is likely due to the strong return of M&M Financial of 21.6% while the strong return of ROE is 14.6%.
