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M.V.S. Santosh Kumar

The fall in demand for loans from the automobile sector and increased levels of asset quality slippages, have reduced the profit growth of most non-banking financial services (NBFC) players.

Bajaj Auto Finance, Cholamandalam DBS Finance, Sundaram Finance, M&M Financial Services and Shriram Transport Finance, the five prominent NBFCs, have aggregately seen net profit grow by 32 per cent over FY08. The profit growth in 2006-07 over 2007-08 was 58 per cent. The profit picture may look skewed due to much higher profit growth registered by Shriram (57 per cent) and Bajaj (64 per cent). Barring Chola DBS, none of the NBFCs have seen a decline in profit growth.

While the loan disbursement for Shriram has been flat, others such as Sundaram and Bajaj have a different story to tell. Sundaram experienced an 11 per cent fall in disbursements while Bajaj Auto Finance saw a 19 per cent fall.

The high growth in disbursements that NBFCs enjoyed during the earlier boom periods now moderated largely due to the meltdown in the automobile sector. The fortunes of these companies predominantly rested on the auto sector (commercial vehicle, two-wheeler, and three-wheeler) which witnessed significant fall in volumes. Though there was slowdown in disbursements, with falling interest rates these NBFCs managed a reasonable growth of 25 per cent in their net interest income on an average, as the borrowing rates continued to fall more rapidly than the yields made from lending.

As with their banking cousins, the asset quality of these NBFCs has seen higher slippages last fiscal. For the year ended FY09, Shriram and M&M have seen their gross NPA (non-performing assets) ratio rising by 23 basis points and 110 basis points respectively. Slippages were also seen in Sundaram’s and Bajaj’s loan books. NBFCs can take heart from the fact that their portfolio is secured in the form of asset financed by them which would help them limit their credit losses. But provisions for bad debts though grew in the range of 14 per cent and 84 per cent thereby denting the profits.

It is expected that asset quality may get worse before getting better. The automobile slowdown that became pronounced between October 2008 and March 2009 may have negative effects on the NBFCs’ books for the next couple of quarters. However, the Reserve Bank’s recent relaxation in asset repossessing norms may benefit the NBFCs. An auto sector revival (supported by encouraging sales data in over the last couple of months) may boost the disbursements of loans..

More Stories on : Consumer Finance | NBFCs | Non-Performing Assets | Credit Market

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