Asset quality, growth fears crop up for NBFCs over YES Bank, virus scare

Shares of non-banking financial companies (NBFCs) are caught in the same storm as banking stocks, which continue to reel from the contagion impact of the YES Bank bailout and the coronavirus pandemic.

Though the market trend was bearish (the BSE Sensex was down 5.6 per cent), the stocks of NBFCs (including housing finance companies) lost up to 14.6 per cent on Wednesday.

So, what are investors worried about?

The Street is sceptical of the sustainability of rich valuations of large players such as Bajaj Finance and Housing Development Finance Corporation (HDFC) because the overall market continues to remain subdued with continuous selling pressure from foreign institutional investors (FIIs), which is making it difficult for players to gauge the bottom level for the market. 

Apart from this, another important factor dragging down NBFC stocks is that the negative impact of coronavirus is also expected to hit the non-banking lenders’ near-term fundamentals. 

According to Lalitabh Shrivastawa, deputy vice-president at Sharekhan, “With coronavirus, there are fears of rising pressure on asset quality. A likely operational impact for some pockets of the corporate sector could lead to collateral damage for NBFCs.” 

To contain the spread of the pandemic, many key sectors such as aviation, hospitality, and retail are witnessing a pause in operations, while sectors like automobile would also see supply-chain disruption.

Source: Exchange

While the above would affect the repayment ability of various companies, especially the small and medium-sized, it could also pose a risk to retail asset quality in the case of any job loss or sharp business impact on self-employed individuals. 

For instance, following the international travel ban, GoAir has started temporary rotational leave without pay to its employees for the short term, according to media reports.

G Chokkalingam, founder and managing director of Equinomics Research & Advisory, added: “Daily wagers would see a higher impact because there is disruption in the migration of people due to the coronavirus spread. This would hurt microfinance asset quality.” 

He also said the salaried/retail assets of NBFCs would be affected. Coronavirus has only added to the woes for NBFCs’ asset quality, which has already seen deterioration in the quarter just gone by.

In addition to asset quality worries, loan book growth could also be affected because demand for discretionary items is expected come down for a few quarters. Thus, how the companies manage their growth and asset quality would be a key factor.

For now, experts say investors should be selective while bottom-fishing even as the valuations of many stocks have fallen to their respective mean levels, as overall market sentiment would continue to remain muted till the spread is contained.