Stories
RBI Rate Hike Unlikely to Cause Widespread NBFC Stress: Report
- •A potential RBI rate hike is unlikely to trigger broad-based asset quality stress among NBFCs, with risks confined to select segments unless accompanied by prolonged tightening or a major macroeconomic shock, according to Nuvama Institutional Equities.
- •NBFCs currently exhibit healthy asset quality, and past trends indicate that rate hikes alone have not caused widespread stress.
- •During the FY22-24 tightening cycle, NBFC asset quality improved despite a 250-basis-point repo rate increase, supported by strong credit growth, higher write-offs, better underwriting, and stronger provision buffers.
- •Gross non-performing assets (GNPAs) for NBFCs declined from 5.7% in March 2022 to 4.6% in March 2023, as highlighted by the RBI.
- •Healthy capital and provision buffers across most NBFCs, along with abundant systemic liquidity, are expected to cushion headline asset-quality ratios, making any deterioration more likely to be segment-specific rather than broad-based.
Key Questions Answered
According to a Nuvama Institutional Equities report, a potential RBI rate hike is unlikely to trigger broad-based asset quality stress among non-banking financial companies (NBFCs) unless it is accompanied by a prolonged tightening cycle or a major macroeconomic shock. Past trends indicate that rate hikes alone have not caused widespread deterioration.
During the FY22-24 monetary tightening cycle, NBFC asset quality actually improved despite a 250-basis-point increase in the repo rate. This resilience was supported by strong credit growth, higher write-offs, better underwriting, and stronger provision buffers, with gross non-performing assets (GNPAs) declining from 5.7 per cent in March 2022 to 4.6 per cent in March 2023.
The impact of the West Asia conflict and global spillovers has remained contained and confined to select low-ticket unsecured personal loans (PL), business loans (BL), micro-LAP, and commercial vehicle or construction equipment (CV/CE) segments. Additionally, El Niño-related risks warrant monitoring as winter crops could experience a lagged impact.
