investment in NBFC stocks: Liquidity abundant, but regulatory curbs holding back NBFC growth ambitions: Shweta Daptardar

“There have been certain stress on the loan book front as well for certain subsegments like MFI. Even CV financers have seen a sluggish quarter. The only subsegment which has done well for Q4 is housing financiers and affordable piece,” says Shweta Daptardar, Elara Capital.

Firstly, give us some sense that what has been your reading from the earnings so far? How do you see the quarterly earnings panning out, NBFC especially because quite a mixed commentary coming in from the MFI space specifically where some of the companies are highlighting that the worst is behind, but some do expect that it will take a next couple of quarters for the whole segment to once again come back to track.
Shweta Daptardar: So, NBFC earnings for Q4 FY25 have turned out to be mixed, largely from the pressures coming from asset quality challenges and this is also because of RBI or regulatory intervention across business segments.
There have been certain stress on the loan book front as well for certain subsegments like MFI. Even CV financers have seen a sluggish quarter. The only subsegment which has done well for Q4 is housing financiers and affordable piece.

Going forward the larger, the bigger picture is while the liquidity has been strong in the system, and we are in a downward interest rate regime, so that has been boarding well for NBFCs.

So, while valuations have caught up really well because of the favourable macros, the earnings need to catch up. As far as microfinance picture is concerned, so the latest Tamil Nadu ordinance bill has further challenges at least for near term for microfinanciers.

So, while the ordinance bill does not have regulated entities under its purview, but given the fact that the ordinance clearly highlights the coercive practices of lenders in terms of recoveries, so there might be impact for one or two quarters on the front of collections for most of these microfinanciers.

So, maybe one or two quarter pressures still persist for microfinanciers and taking precedence from Karnataka wherein, of course, the stress was slightly on the higher scale, but Tamil Nadu being one of the largest market, so it is the second largest microfinance market with over 13% market share in the entire microfinance space. So, yes, the stress would also be slightly persisting at least for first half of this fiscal. How is that the liquidity surplus effect is not visible in NBFCs. I mean, forget the numbers, even the commentary they are not sounding great, they are sounding thanda. First, they were complaining give us liquidity, we will give you growth. Now, liquidity is there but they are not ready to commit to growth.
Shweta Daptardar: Yes, see, the moot problem is so all the NBFCs have seen aggressive growth in past two years, especially post covid be it on the retail loan side, so be it microfinance, be it personal loans. So, personal loans grew at accelerated pace of 50% growth in January 2025 over 2024. So, most of the retail segments including gold loans, of course, gold loans was underpinned also by the underlying price dynamics, but most of these NBFCs have seen strong growth between 23 to 25, that is where the regulatory forbearance came into picture, that is where the regulatory oversight increased because this aggression in lending led to overleveraged scenario at the borrower levels in turn increasing the risk on the balance sheets.

So, now, that regulator has become more cognisant about balance sheet risk augmentation for these NBFCs and they have been told to sort of slow down and sort of have a calibrated growth expansion, so regardless of liquidity or favourable scenario panning out for NBFCs, you might not see equal amount of translation or stronger transmission on the growth front. Having said that, valuations of NBFCs have really caught up well in past one year reflecting these strong macros. But like I said earlier, earnings need to catch up and that is where FY26 looks slightly under pressure.

What about MFI companies in specific, I mean because all of them at least in their commentary have stated that they do anticipate a recovery in FY26, do you sense that happening or do you think it is going to be very patchy and not an across-the-board recovery that we may see?
Shweta Daptardar: Yes, you are probably right because the scenario which is unfolding at microfinance lenders now is they do are seeing challenges in terms of collections or forward flows. But the problem is not just asset quality.
Are there supportive incremental triggers for ROA expansion in the immediate future? The answer is no. So, while there has been caution on new customer acquisition while the Mfin and Sa-Dhan guard rails are also in place which restrict a particular microfinance lender to go gung-ho on loan book expansion or new to credit customer acquisition, so all these points put together growth as well as margins will remain under pressure and therefore, FY26 really do not look strong. So, even the largest player in the space might put up little over 3-3.5% kind of ROAs for this fiscal and perhaps 4.5% next year.

So, for such a high yielding business and high ROA business, we are talking about 3.5-4% ROAs because most of the parameters or catalyst to the profitability metrics are still a miss.

So, you will not recommend our viewers that they should start buying into NBFC stocks, especially MFI stocks. I mean, the turn is still a distance away that means?
Shweta Daptardar: Oh, MFI stocks we would still wait. We are definitely waiting for the cycle to turn around and that is still distant, that is still at least two to three quarters away. As far as NBFCs are concerned, so look as long as we are in a lower interest rate regime, there are rate cuts on the horizon. NBFCs will definitely remain in limelight. We have to be cherry picking wherein like I mentioned the ones which have strong liquidity buffers and which are showing healthy EPS CAGR those are the ones which you should be looking at in the NBFC space for next one to two years.