The non-banking financial sector recorded robust performance in the October to December quarter (Q3) of FY25, driven by strong loan growth and higher net profit. Housing finance companies (HFCs) and non-banking financial companies (NBFCs) benefited from a positive surprise in net interest income (NII), which helped sustain net interest margins despite elevated operating expenses.

Housing finance companies saw a 14.5% year-on-year (YoY) growth in loan disbursements and a 3.2% increase on a sequential basis. Excluding LIC Housing Finance and Sammaan Capital, assets under management (AUM) growth was even stronger at 27.3% YoY and 5.5% sequentially.

NII growth remained solid at 20.5% YoY and approximately 3% sequentially, leading to an expansion in net interest margin (NIM) to 4.45%, up 22 basis points (bps) YoY, though down by 1 bps sequentially.

For NBFCs (excluding HFCs), AUM grew by 16.5% YoY and 3% sequentially, while NII increased by 17.7% YoY and 4% quarter-on-quarter. The NIM expanded to 6.6%, reflecting a 7 bps YoY increase and a 6-bps sequential rise.

Operating expenses surge led by growing employee costs

Despite strong revenue growth, operating expenses surged, driven largely by rising employee costs. HFCs witnessed a 32% YoY increase in operating expenses and an 8.3% rise quarter-on-quarter, impacting overall operating profit, which rose 5.7% YoY but declined 2.7% sequentially.

NBFCs also faced similar cost pressures, with employee expenses climbing 15.1% sequentially and nearly 26% YoY. As a result, operating profits grew 14.7% YoY but saw a marginal decline of over 1% on a sequential basis.

HFCs saw a sharp decline in provisions, which stood at ₹60 crores—down 92% YoY and 98.5% sequentially—leading to a 21% YoY increase in net profit and a 373% rise sequentially. Meanwhile, NBFCs reported provisions of ₹8,700 crores, a 72% YoY increase but down 2% quarter-on-quarter. Their profit after tax surged 29% YoY and 7.35% sequentially.

Asset quality shows signs of improvement

Asset quality across both HFCs and NBFCs showed signs of improvement. For HFCs, the gross NPA ratio declined to 1.75% from 2.1% in the previous quarter, while the net NPA ratio dropped by 3 bps sequentially. The absolute value of gross NPAs fell 15% quarter-on-quarter, and net NPAs saw a decline of over 1% sequentially.

NBFCs, however, presented a mixed picture. While the gross NPA ratio improved to 9.77% from 10% in the prior quarter, absolute gross NPAs rose 0.6% quarter-on-quarter. Net NPAs increased 3.5% in absolute value, though the ratio remained relatively stable at 4.14% compared to 4.12% in Q2.

Analysts predict a moderation in loan growth across various NBFC segments, with gold loans being an exception. Asset quality stress is emerging in vehicle finance, micro-loans against property, and affordable housing. The microfinance sector, in particular, is expected to face continued pressure.

The impact of the RBI’s anticipated rate cuts will be sector-specific. Fixed-rate NBFCs like Mahindra & Mahindra Financial Services (MMFSL), Shriram Finance, and Cholamandalam Investment & Finance stand to benefit, while floating-rate NBFCs, such as HFCs, may experience a negative impact.

Valuations for leading players remain around long-term averages, with companies like MMFSL, Shriram Finance, Bajaj Finance, and Cholamandalam Investment & Finance expected to maintain earnings growth in the 15-20% range.

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