A possible rate hike by the Reserve Bank of India (RBI) is unlikely to cause widespread stress on loan quality at non-banking financial companies (NBFCs), says a new report. Nuvama Institutional Equities shared the view in its October report, which came out on October 3.
It says the risk will stay limited to a few segments. The picture could change only if rate hikes continue for long or a major shock hits the economy. Nuvama bases its view on healthy loan quality today and on how NBFCs fared in the last tightening cycle.
Also read: India’s NBFCs Maintain Growth Track Despite Pressure on Lending Margins
NBFCs currently have strong capital, solid provisions and plenty of cash in the system. These cushions should protect their overall bad loan numbers. The report points to the FY22-24 cycle, when the repo rate rose by 2.5 percentage points.
Even then, NBFC loan quality improved. Bad loans fell from 5.7 per cent in March 2022 to 4.6 per cent in March 2023.
Nuvama says "monetary tightening by itself has not been sufficient" to hurt the whole sector. Stress usually builds when rate hikes come with long external shocks or cash shortages. It adds that any weakness is likely to stay "pocketed and segment/player specific."
The report also names the weak spots. The West Asia conflict has so far hit only small unsecured personal loans, business loans, small loans against property, and commercial vehicle and construction equipment loans.
Also read: RBI Backs New UPI Charge for Transactions Above Rs. 2000
Profits may not take the same hit across all lenders. Nuvama says the effect on margins depends on how fast a company's old loans and borrowings reset to new rates. A firm with a bigger gap between the two will feel more pressure.
El Niño is another factor to watch. Its effect has been limited so far, but Nuvama says the real impact could show up later if the winter crop suffers.
The report adds that strong lending checks, careful cash management and close tracking of each segment will stay important as rates change.