That Sinking Feeling About NBFC Balance Sheets

The stock prices of L&T Finance, a financial services company, fell to a four-month low on Tuesday. According to a report by NDTV Profit, this was after HSBC Global Research reduced the target price on the stock citing disruption in asset under management and earnings per share growth in the near term. This was reportedly due to sectoral headwinds in microfinance, a sub-segment of finance.

This isn’t the case with L&T Finance alone. Indian NBFC Bajaj Finance reported a lower-than-expected second-quarter profit on Tuesday as it set aside more funds for potential bad loans. The company reported a consolidated profit after tax of Rs 4,014 crore in the September quarter. Reuters reported that estimates by LSEG showed that analysts had expected this to be at Rs 4,343 crore.

Bajaj Finance’s profits had been lower than expected even in the first quarter of the financial year. The NBFC’s losses increased in the past quarters particularly because of the personal loan segment in rural regions, the Reuters report said.

Froth Driven By Borrowing

In India, most NBFCs have been asked to stop lending along with a series of crackdowns by the country’s central bank, the Reserve Bank of India (RBI). The latest was on a few app-based lenders for usurious lending or unlawful interest rates and poor due diligence, among other things. It is no secret that the RBI has been consistently warning about excessive lending in the segment of unsecured and small loans.

More aggregate data in terms of impact on banks and NBFCs will emerge in the coming days. But it is clear that there was froth at the top when it came to consumption and demand, whether for products or services or driving speculative activity in the stock markets. This froth has been driven by borrowing and not real income.

The extent of this may be limited and might not cause systemic damage because the controls at the top are fairly strong. The RBI has been steadily tightening norms, including asking for more risk weights on the lenders' balance sheets, as it did in November 2023.

But the unwinding can be painful, mostly for those who borrowed and recklessly consumed. Markets could slip further and more small loans could go bad. This would raise some questions on the nature and quality of the increased consumption in the first place.

Misreading Consumer Demand

A good part of the post-Covid spike in spending was driven by borrowing. The problem isn’t the borrowing in itself but how it affects the interpretation of the quality of spending and also consumer spending data. It would appear that companies have overinterpreted consumer spending behaviour and are sounding somewhat surprised as it moderates.

There is that sinking feeling which will stay till we are able to see the full picture of what really happened in the last three years - particularly on the balance sheets of NBFCs, and worse, the balance sheets of individuals, which we may never see..