RBI Rate Hike Unlikely to Trigger Broad-Based NBFC Asset Quality Stress
A potential Reserve Bank of India (RBI) rate hike is unlikely to result in broad-based deterioration in the asset quality of non-banking financial companies (NBFCs), according to an October report by Nuvama Institutional Equities. The report said any stress is more likely to remain concentrated in specific segments unless monetary tightening becomes prolonged or is accompanied by a significant macroeconomic shock. It noted that NBFC asset quality is currently healthy and that historical evidence suggests that rate hikes alone have not generally resulted in widespread deterioration.
The report pointed to the FY2022-24 tightening cycle, when the repo rate increased by 250 basis points, yet NBFC asset quality improved. According to RBI data cited by Nuvama, gross NPAs declined from 5.7% in March 2022 to 4.6% in March 2023. The improvement was supported by strong credit growth, higher write-offs, better underwriting and stronger provisioning buffers. Nuvama said current risks from the West Asia conflict and global spillovers have so far been concentrated in select segments, including low-ticket unsecured personal loans, business loans, micro-LAP and commercial vehicle/construction equipment finance.
The report also highlighted the importance of capital and provision buffers, systemic liquidity and the pace at which assets and liabilities reprice. While higher interest rates could affect NBFC margins, the impact is unlikely to be uniform because institutions have different asset-liability repricing profiles. Nuvama also said El Niño-related risks remain limited so far but should be monitored because their effects on winter crops could emerge with a lag. Overall, the report indicates that credit underwriting, liquidity management, asset-liability management and segment-level monitoring will remain important as NBFCs navigate changes in the interest-rate environment.
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