RBI Rate Hike Unlikely to Trigger Broad-Based Stress in NBFCs, Nuvama

Despite speculation of a Reserve Bank of India rate hike, the impact on non-banking financial companies' asset quality is likely limited, according to Nuvama Institutional Equities. The firm's October report notes that risks remain concentrated in specific sectors. Only posing a broad-based stress if monetary policy tightening persists or is accompanied by a significant macroeconomic downturn.

".monetary tightening by itself has not been sufficient to trigger a broad-based deterioration in NBFC asset quality," Nuvama said. It added that “Stress has typically intensified when rate hikes have coincided with prolonged external shocks or funding/liquidity disruptions.”.

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Nuvama noted that during the FY22-24 monetary tightening cycle, NBFC asset quality improved despite a 250-basis-point increase in the repo rate. The improvement was supported by strong credit growth, higher write-offs, better underwriting and stronger provision buffers, the report said.

Citing RBI data, Nuvama said gross non-performing assets (GNPAs) declined from 5.7% in March 2022 to 4.6% in March 2023.

The report said the impact of the West Asia conflict and global spillovers had so far remained limited to select segments of the NBFC sector.

Most non-banking financial companies (NBFCs) have bolstered their capital reserves and provisioning buffers, bolstering their financial stability. The strong liquidity in the system and incentives for credit expansion are also expected to mitigate the impact on asset quality ratios.

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“Any deterioration is more likely to remain pocketed and segment/player specific rather than broad-based, unless rate hikes become prolonged and are accompanied by a material external or macroeconomic shock,” it said, according to news agency ANI.

Nuvama also said the impact of the interest-rate cycle on NBFC profitability would vary depending on how quickly assets and liabilities reprice. “The impact of a rate cycle on NBFC margins is unlikely to be uniform with the key differentiator being the mismatch between the repricing of existing assets-liabilities and incremental movement,” it said.