Money9: Reserve Bank NBFC The criteria for have changed. When investors (INVESTORS) Is set to have an impact on. Let us understand this with the example of Ashish. Ashish of Udaipur is an old player in the stock market. Considering himself a stock market juggler, he is betting on a sector in which he feels he will have the opportunity to make money in the future. Under this strategy, it staked on non-banking finance companies i.e. NBFC shares. But this time his confidence seems to have faltered.
NBFC stocks are in bad shape. The present day has seen a lot of changes for this sector. The Reserve Bank has raised interest rates twice in the last two months. In addition, a major challenge for the sector is that the Reserve Bank has recently tightened the loan disbursement criteria for the sector. Now the sector has to follow the same rules and regulations as the banks.
Expert opinion
Now the question arises in your mind what will be the problem for NBFC (NBFC) from all this. To understand this you need to know the opinion of rating agencies and experts. VK Vijayakumar, chief investment strategist at Geojit Financial, says interest rates are likely to rise further. The repo rate is projected to be close to six per cent at the end of this cycle.
The rating agency estimates that rising interest rates could increase NBFCs’ borrowing or funding costs. It is estimated that NBFC’s funding cost may increase by 0.85% to 1.05% this year. From October 1, 2022, the NBFC will face a new challenge. The RBI has issued rules to curb the bankruptcy of NBFCs for the stability of the financial system. This will also increase the cost of NBFC loans.
How NBFC will pass-on expenses
Now the question is how much NBFC will be able to pass-on the increased cost. So the answer is that 35 to 40% of NBFC’s total AUM i.e. assets under management comes from the home loan segment. Both types of new customers should pass-on the increased cost as most home loans are offered at a floating rate. But the rise in interest rates due to increasing competition with banks may not be exactly the same as the increase in spending.
Auto loans on the other hand and in other segments like micro, small and medium enterprises i.e. MSME financing most of the loans are given at fixed rates. This means that the increased rates can only be applied to new loans.
What is the performance of NBFC?
Now let’s see how the NBFC is performing. So if we look at the fourth quarter results for NBFC, it is clear that NBFC’s NPA i.e. asset quality has improved. The slight effect of Omicron and the low account NPAs have improved the asset quality. According to rating agency ICRA (ICRA), NBFC’s NPA fell from 5.7% in December 2021 to 4.4% in March 2022.
This is a matter of performance. Now also find out what is the outlook of this sector i.e. the opinion of NBFC itself or other experts regarding the future performance. So one thing is clear that despite all the challenges, NBFC is bullish on Outlook. Their loan growth is projected to remain strong. There is hope for recovery in demand in both rural and urban areas. Sales of new vehicles are expected to grow. Now companies are focusing on reducing credit costs which is likely to improve profits.
Demonstration of NBFC shares
Now let’s take a look at the performance of NBFC shares. The condition of all such companies has deteriorated in the last one year. In the last one year, all the major companies except Cholamandalam Investment have given negative returns. That is why investors have suffered huge losses. Overall, rising funding costs are likely to put pressure on NBFC’s margins. But strong demand, improvement in asset quality and cushions of provisioning are not expected to put further pressure on profits.
Experts say that the decline in these stocks is in line with the downturn in the market. So people like Ashish can expect good returns by investing in this sector in the long run.
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