UR Bhat, MD, Dalton Capital Advisors:
This is one sector that can assure a steady return and reasonable growth. Even if you invest in a stock that is already on the investors’ radar, given its robust financials, you will still get a 15% compound annual growth rate. While there are NBFCs that are lending to much more risky categories, they have got much higher margins which helps them make appropriate provisioning. So, even though their gross NPAs will be higher, their net NPAs will be lower. Hence, I don’t see any hidden mines in the balance sheet. Also, we need to understand that over the past few years NBFCs have undergone dramatic transformation thanks to the RBI. In terms of regulation, they are not that different from banks, barring for a minor concession on the number of days after which they need to downgrade an asset. In short, most NBFCs are well managed with few asset quality risks.
Gautam Trivedi, CEO, Religare Capital
Right now there is a gold rush for microfinance companies among investors as just about every new listing in this space has seen a sharp run-up. We could see more microfinance institutions hitting the market. However, there is a reason to be cautious on the overall non-banking finance space as many of these stocks may not be able to sustain their valuation. The problem of non-performing loans for NBFCs is perhaps not yet fully factored in by the Street. While there has been a sharp deterioration in the asset quality of commercial banks, one wonders how NBFCs are reporting stable asset quality when the entire banking industry is going through pain? There is a real fear that the market may have not have priced in these concerns yet. The problem will come to the fore soon as the economic cycle has not yet fully recovered, in spite of the government’s formidable efforts.