Falling asset quality, credit costs weigh on major NBFCs in Q2FY25

Driven by cash flow disruptions, challenges seen in unsecured segments

Major non-banking financial companies (NBFCs) faced increased credit costs and a decline in asset quality during the second quarter of FY25 (Q2FY25) compared to the previous quarter. This is primarily due to disruptions in cash flows and challenges in the unsecured segments, including microfinance.

 

For Mahindra & Mahindra Financial Services (M&M Finance), gross stage 3 assets in Q2FY25 stood at 3.83 per cent, 20 basis points (bps) higher than 3.6 per cent in Q1FY25.

 

“….40 per cent of the increase in gross stage 3 has come from the tractor segment. And, we have witnessed pain mostly in the agrarian states where cash flows have been disrupted. The cash flow issue is not just in the agri sector, but some in the commercial vehicle (CV) customer segment has also seen a bit of elevated pain in Q2. This has had a bearing on our collection efficiency,” Raul Rebello, managing director (MD) & chief executive officer (CEO) of the company said during the post earnings analyst call. 

 

Meanwhile, asset quality of L&T Finance has been largely stable due to the write-offs. The gross stage 3 assets of the company inched up marginally to 3.19 per cent from 3.14 per cent in Q1FY25.  

 

During the post earnings call, Sachinn Joshi, chief financial officer (CFO) of L&T Finance agreed that the write-off has helped reduce the increase in stage 2 and stage 3 assets.

 

NBFCs classify their bad loans in three categories or stages. Stage-1 includes loans which are overdue by up to 30 days, Stage-2 are loans which are overdue by 31-89 days, and in Stage-3, loans are overdue for over 90 days.

 

He also said, “…the deterioration in gross stage 3 assets was primarily because of the macro operating environment deteriorating in the rural business finance vertical, a rationalisation of the tractor repo policy and some localised adjacencies in the two-wheeler business. Yes, there have surely been challenges externally in the microfinance segment. But that is about 26 per cent of our overall book.”

 

Bajaj Finance also witnessed asset quality pressure across its retail and small and medium enterprise (SME) lines of business, resulting in its loan loss provisions remaining elevated.

 

In Q2, the lender saw its stage 2 assets reduce by Rs 357 crore but its stage 3 assets increased by Rs 899 crore, resulting in a net increase in stage 2 & 3 assets of Rs 542 crore.

 

Additionally, the management has increased credit cost guidance to 2-2.05 per cent in FY25 from 1.75-1.85 per cent earlier.

 

Rajeev Jain, MD, Bajaj Finance, said, “…those clients who have more than three live unsecured loans are showing higher propensity to default and in general have lower downstream collection efficiencies. So, as we look at this data, we are continuing to tighten our underwriting norms for such cohorts of customers across all our products.”

 

Piramal Enterprises also highlighted concerns in the unsecured portfolio in business loans and risk deterioration in the sub-Rs 50,000 segment.

 

Gross non-performing assets (GNPAs) of the company rose to 3.1 per cent from 2.7 per cent in Q1. The Q2 net credit cost stood at 1.6 per cent against 1.3 per cent Q1.

 

Jairam Sridharan, MD, Piramal Capital & Housing Finance, said, “…within all the unsecured areas, the area where we see the most steady increase in risk is business loans, which also includes a small microfinance portion. Within unsecured business loans, the sub Rs 50,000-category is where we are seeing the steepest risk deterioration.”

 

Even as the credit costs remain elevated in the quarter, certain companies believe that it has peaked. They see moderation from H2FY25 while others anticipate a further pressure on credit cost due to the external environment.