Earlier this week, among the noise and clutter of quarterly results, one particular company stood out. Bajaj Finance reported
the following: 54% year-on-year increase in its 1QFY17 profits, 45% increase in net interest income, and 40% increase in assets under management; loan loss and provisioning, however, was also up 75%. The company’s stock price hit a new 52week high on the day of its 1QFY17 results and is up a whopping 70% year-to-date. With a market capitalization of Rs557bn, Bajaj Finance is now larger than a private sector bank like YES Bank (Rs551bn) and public sector banks
like Canara Bank (Rs359bn) and Punjab National Bank (Rs265bn).
Bajaj Finance joins an elite list of NBFCs that are seeing their stock prices hit a new high almost every day. These include, Bajaj Finance’s parent company Bajaj Finserv, and other NBFCs such as L&T Finance, Capital First, Muthoot Finance, and many more. There is no separate index for NBFCs, but the S&P BSE
Finance Index (which includes 87 banks
and NBFCs) is up 7.5% in the past year, compared to 4.1% for the S&P BSE
Banks. In the past month alone, the Finance Index is up 10.1%, compared to 8.3% for the Bank Index.
Up and away!
Indeed, the performance of NBFCs stands out in stark contrast to the overall depression surrounding the banking sector which has been plagued with rising non-performing assets (NPAs), stagnant credit growth, and a future dependent in part on the long-waited revival of India’s capex cycle. Private sector banks
have been outperforming their public sector counterparts but Axis Bank’s 1QFY17 quarterly results (profits down 21%) show that the burden of NPAs isn’t over for the banking system at large.
Why are NBFCs beating banks?
Admittedly, the comparison might not be a fair one considering the business models of banks
and NBFCs are different and NBFCs aren’t as widely regulated as banks. For example, a bank needs a license to open a new branch, while an NBFC
is under no such regulation. On the other hand, NBFCs can accept fixed deposits from the public but cannot offer savings accounts to them. Even so, Bajaj Finance’s results show some interesting underlying trends. For 1QFY17, Bajaj Finance’s largest segments in terms of AUMs were loans against property, consumer durables, and business loans. Bajaj Finance’s fastest-growing business segments were rural lending, digital product finance, and loans against securities, albeit off a low base. Some of these are sectors where banks
do have a large presence.
Thus, there are two trends: first, NBFCs are rapidly building a large base for financing consumers (also known as ‘retail lending’), which includes finance of two-wheelers, cars, consumer durables, etc. On this front, NBFCs are taking on the banks. For example, Bajaj Finance has increased its number of branches for consumers from 91 in FY13 to 272 at end-1QFY17. Its point of sales (POS) for consumer durables tripled from 3,500+ to 10,800+ during the same period. Second, with NPAs forcing banks
to reign in lending, NBFCs have further room for growth in areas such as SME loans, business loans, etc. However, maintaining a high quality loan book will be important for NBFCs to avoid NPAs. Building this book will be neither easy nor cheap. Recall that even for Bajaj Finance, loan loss and provisioning surged in 1QFY17.
And finally, the surge in microfinance stock prices also shows that the story of consumer lending – in this case, small ticket in rural areas – continues to be strong. Bharat Financial’s stock price is up 77% year-to-date, Manappuram is up 171%, and the recently listed Ujjivan’s stock price has more than doubled from its IPO price.
The boom in consumer finance is real. It is also a good proxy to the strength in consumer demand and resilience of growth in India’s services sector. But the boom can easily turn into a bubble. Microfinance companies know that well. Thus, NBFCs will have to exercise caution to avoid excesses. Runaway lending binges usually leave behind a nasty hangover. Ask the banks
who are still recovering from one.
Anupam Gupta is a Chartered Accountant and has worked in equity research since 2000, first as an analyst and now as a consultant. He contributes to the Business Standard platform, Punditry, through his blog, Beyond Markets on markets & the economic horizons.