Banks and NBFCs have been the star performers in this rally, and despite some pressure on net interest margins, their June quarter earnings were strong and, in many cases, better-than-expected. The widely held view among analysts is that the performance can sustain, thanks to robust demand for loans. Banks are on a good wicket, but Rajeev Thakkar, CIO, PPFAS Mutual Fund is not so sure about NBFCs.
“Banks are looking good in terms of their balance sheet as well as asset quality. But overall, the weightage of financials in the total market cap is creeping up and especially in the NBFC space and the fintech space, everybody wants to do everything,” Thakkar told said in an interview to Moneycontrol. “I think a sense of complacency is setting in.”
According to Thakkar, the situation today is reminiscent of the 90s when almost every business house saw a huge opportunity in the NBFC space.
“Whether related, unrelated, companies were rushing in. You had Cipla, ITC, GE Shipping, Tata Group all setting up NBFC arms. A similar trend is being seen today as well. That is a bit concerning. It’s becoming too competitive and there is not much differentiation and, down the road, it may not end too well,” he said.
Thakkar said he enjoyed playing games on his cellphone. Of late, almost all the ads that popped up were for personal loans with a few clicks.
“Sometime back, Chinese apps were hard-selling such loans. Now even NBFCs and fintechs want to offer all these kind of loans and stuff like that. That’s worrying,” he said.
What about the fact that demand for consumer loans, personal loans and small business loans has been quite strong in recent times. Also, India being a growing economy, would that lead to demand for more credit and help NBFCs and fintechs sustain their high growth rates?
Thakkar feels there is no problem when NBFCs are lending money.
“Everything is fine when you are lending… So, you have X as the cost of funds, you load your margin on that and you do the lending. Now, when the portfolio matures, and after some time when you start seeing whether repayments are coming on time or not, and what are the delinquencies, how much cost and effort is required to recover money, all that comes down the road. Then there is the periodic surge in interest rates as well, leading to asset-liability mismatches,” he said.
Banks don’t have much of a problem because they have access to low-cost funds in the form of savings account and current account, Thakkar said. NBFCs don’t have that advantage. Then there is a problem of occasional blow-ups in the debt market because of corporate defaults, Thakkar said, pointing out the instances of Ballarpur Industries, Zee group, ADAG, IL&FS, Punjab Maharashtra Co-operative Bank, and DHFL.
“When IL&FS and DHFL went under, the market completely froze, and investors were wary of lending to NBFCs in general,” he said.
Thakkar feels valuation of NBFC stocks is not so much the worry. He says only a handful of NBFC stocks are expensive.
“It’s just that anyone and everyone who has a team which can develop a mobile app is coming and saying, okay, we’ll enter the NBFC space and we’ll offer personal loans and we will offer EMI-based thing for consumer durable purchases and those kinds of things. So there’s no differentiation. Everyone is going via the CIBIL or via the account aggregator data and all of that,” he said.
A section of the market is worried that banks are making loans to corporates at unsustainably attractive interest rates, and this could turn out to be a problem at some point. Thakkar agrees that credit costs—banks expenses for managing credit risk and potential loan losses—are low, but that in itself is not a cause for concern.
“Corporate credit moves in cycles where there’s a lending boom, then towards the end of the lending boom, the quality of lending becomes poor. And, then there’s over capacity and corporates have problem paying back and then default starts. So, I agree with the view that credit costs right now are low. But when will they increase? I think that’s far away because firstly we have yet to see a lending boom before the credit costs come in. So far, capital expenditure has been largely on the government side. Private sector capital expenditure as it is not very high or things like that. So, to that extent, I am not worried. Retail lending broadly by banks has been more or less of a good quality,” he said.
To read the full interview, click here:
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