Asset Holding and Finance Companies witnessed improvement in Net Interest Margins: CareEdge

AHFCs improving margin: Asset Holding and Finance Companies (AHFCs) have witnessed an improvement in Net Interest Margins (NIM) in FY23, thanks to the swift repricing of loans compared to liabilities. a report by CareEdge said. The growth in the higher-yielding non-housing portfolio, along with a reduced liquidity buffer, has further boosted spreads. However, there's an impending pressure on NIM due to the impact of the earlier rise in the cost of funds during the current fiscal year.

Despite cautious handling of interest rate hikes to balance growth, asset quality, and margins, AHFCs, with relatively high lending rates, are experiencing a notable number of balance transfers as existing borrowers shift towards banks or larger Housing Finance Companies (HFCs).

In response to the rapid growth in specific consumer credit segments, the Reserve Bank of India (RBI) issued guidance on November 16, 2023, directing banks and NBFCs to manage anticipated risks by increasing risk weights for NBFCs rated A and above on consumer credit exposures, excluding specific categories. Although housing loans are exempted, the tightened liquidity conditions are expected to keep the cost of funds elevated in the short to medium term.

Despite an expansion in disbursements and branch networks, operating expenses to average total assets ratio have reverted to pre-Covid levels. Credit costs have remained well-managed due to robust asset quality metrics. As interest rates are expected to soften in the second half of fiscal year 2025, AHFCs might face an increased likelihood of balance transfers.

Considering the higher operating expenses ratio and the contraction of NIM, the Return on Total Assets (RoTA) is projected to moderate to 3.23 per cent in FY24 and further to 3.04 per cent in FY25, down from 3.8 per cent in FY23. This reflects the evolving dynamics for AHFCs in navigating the intricacies of interest rates, consumer credit, and operational efficiency.