New Delhi [India], October 3 (ANI): A potential RBI rate hike is unlikely to trigger broad-based asset quality stress among non-banking financial companies (NBFCs), with risks likely to remain confined to select segments unless accompanied by a prolonged tightening cycle or a major macroeconomic shock, Nuvama Institutional Equities said in its October report.

As per the report, NBFCs currently have healthy asset quality, at the same time, past trends indicate rate hikes alone have not caused broad-based stress.

"...monetary tightening by itself has not been sufficient to trigger a broad-based deterioration in NBFC asset quality," it said, highlighting, "Stress has typically intensified when rate hikes have coincided with prolonged external shocks or funding/liquidity disruptions."

It noted that during the FY22-24 tightening cycle, NBFC asset quality improved despite a 250-basis-point increase in the repo rate, supported by strong credit growth, higher write-offs, better underwriting and stronger provision buffers.

Citing RBI, the report further highlighted, gross non-performing assets (GNPAs) declined from 5.7 per cent in March 2022 to 4.6 per cent in March 2023.

On current risks, the report said the impact of the West Asia conflict and global spillovers has so far remained limited to select segments.

"Importantly, the impact of the West-Asia conflict and global spill-overs has so far remained contained and confined to select low-ticket unsecured PL, BL, micro-LAP, and CV/CE segments," it said.

At the same time, it noted, El Nino-related risks have remained limited so far, "but warrants monitoring as the real impact possibly could be visible with a lag as winter crop gets impacted."

However, healthy capital and provision buffers across most NBFCs, along with abundant systemic liquidity and support to credit growth, are expected to cushion headline asset-quality ratios.

Thus, "any deterioration is more likely to remain pocketed and segment/player specific rather than broad-based, unless rate hikes become prolonged and are accompanied by a material external or macroeconomic shock."

Regarding profitability, Nuvama said the impact of the interest-rate cycle on NBFC margins would vary depending on how quickly assets and liabilities reprice.

At the same time, it noted, "The impact of a rate cycle on NBFC margins is unlikely to be uniform with the key differentiator being the mismatch between the repricing of existing assets-liabilities and incremental movement." (ANI)