Retail NBFCs outdo private banks in profits as lending picks up pace

Non-banking finance companies (NBFCs) have for the first time reported a higher combined net profit than that of private sector banks. With retail lending picking up pace, NBFCs have emerged as the fastest-growing and the most profitable segment for lenders. In the March quarter, retail NBFCs, such as Housing Development Finance Corporation, Indiabulls Housing Finance, Bajaj Finance and Mahindra & Mahindra Financial were more profitable than some of the private sector banks.
 
Listed retail NBFCs reported a combined net profit of Rs 108 billion during the January-March quarter, compared to private sector banks' net profit of Rs 72.9 billion. Public sector banks reported a combined net loss of Rs 625 billion during the quarter.

 
At this rate, retail NBFCs are likely to overtake private sector banks in terms of annual profits in 2018-19. In 2017-18, listed retail NBFCs reported a cumulative net profit of Rs 383 billion, compared to private sector banks' combined net profit of Rs 401 billion.
 
Retail NBFCs are growing faster than private sector banks in terms of net interest income (NII). Listed retail NBFCs in the Business Standard sample reported NII of Rs 1,275 billion in 2017-18 against Rs 1,229 billion by listed private sector banks.
 

A standard measure of lenders' revenues or net sales, NII is calculated by subtracting interest expenses from gross interest income for the period.
 

The NII of retail NBFCs was up 22.1 per cent, year on year, against 14.8 per cent growth posted by listed private sector banks. As a result, retail NBFCs reported higher revenues than private sector banks in the previous financial year.
 
This analysis is based on the quarterly profit and loss accounts of a common sample of listed banks and retail non-banking finance companies, including housing finance companies.
 
Analysts expect this trend to continue as NBFCs will take advantage of the weakness in the balance sheets of corporate-focused private sector lenders. "There could be moderation in the loan growth of NBFCs in 2018-19 due to tight liquidity conditions in the financial market and increase in their capital cost because of the recent rise in bond yields. However, at 18-19 per cent growth in their loan book, NBFCs can still grow faster than banks, thus increasing their market share," saïd Karthik Srinivasan, senior vice-president and head of financial sector ratings at Icra.
 
According to Icra estimates, the loan of book retail NBFCs was up 23 per cent in 2017-18, growing at the fastest pace in the last four years, while that of private sector banks was up 18 per cent. Public sector banks witnessed a decline in their loan book in the previous financial year.
 
Analysts say non-banking lenders have benefited from the poor profitability of public sector banks (PSBs) and the inability of smaller PSBs to offer new loans. "NBFCs are growing at the expense of PSBs rather than their private sector peers. The retail book of private sector banks continues to grow in the double digits, but many of the smaller PSBs have almost stopped issuing fresh loans, thus opening growth opportunity for NBFCs," said G Chokkalingam, founder and managing director, Equinomics Research and Advisory Services.
 
NBFCs will face some margin pressure due to the recent spike in bond yields, but experts say this is not likely to be a deal-breaker. "NBFCs, especially housing finance companies, are likely to face pressure on their net interest margins, but this is not likely to affect their growth. Most listed NBFCs are well capitalised and can easily raise incremental capital to fund growth if required," saïd Dhananjay Sinha, head of research at Emkay Global Financial Services.