Good morning. In today’s edition: That sinking feeling about the balance sheet of Indian non-banking finance companies (NBFCs); a significant loss in market cap and the ‘Make in India’ boost has missed the mark. 

THE TAKE

That Sinking Feeling About NBFC Balance Sheets 

The stock prices of L&T Finance, a financial services company, fell to a four-month low on Tuesday. According to a report by NDTV Profit, this was after HSBC Global Research reduced the target price on the stock citing disruption in asset under management and earnings per share growth in the near term. This was reportedly due to sectoral headwinds in microfinance, a sub-segment of finance.

This isn’t the case with L&T Finance alone. Indian NBFC Bajaj Finance reported a lower-than-expected second-quarter profit on Tuesday as it set aside more funds for potential bad loans. The company reported a consolidated profit after tax of Rs 4,014 crore in the September quarter. Reuters reported that estimates by LSEG showed that analysts had expected this to be at Rs 4,343 crore. 

Bajaj Finance’s profits had been lower than expected even in the first quarter of the financial year. The NBFC’s losses increased in the past quarters particularly because of the personal loan segment in rural regions, the Reuters report said. 

Froth Driven By Borrowing

In India, most NBFCs have been asked to stop lending along with a series of crackdowns by the country’s central bank, the Reserve Bank of India (RBI). The latest was on a few app-based lenders for usurious lending or unlawful interest rates and poor due diligence, among other things. It is no secret that the RBI has been consistently warning about excessive lending in the segment of unsecured and small loans.

More aggregate data in terms of impact on banks and NBFCs will emerge in the coming days. But it is clear that there was froth at the top when it came to consumption and demand, whether for products or services or driving speculative activity in the stock markets. This froth has been driven by borrowing and not real income.

The extent of this may be limited and might not cause systemic damage because the controls at the top are fairly strong. The RBI has been steadily tightening norms, including asking for more risk weights on the lenders' balance sheets, as it did in November 2023.

But the unwinding can be painful, mostly for those who borrowed and recklessly consumed. Markets could slip further and more small loans could go bad. This would raise some questions on the nature and quality of the increased consumption in the first place.

Misreading Consumer Demand

A good part of the post-Covid spike in spending was driven by borrowing. The problem isn’t the borrowing in itself but how it affects the interpretation of the quality of spending and also consumer spending data. It would appear that companies have overinterpreted consumer spending behaviour and are sounding somewhat surprised as it moderates.

There is that sinking feeling which will stay till we are able to see the full picture of what really happened in the last three years - particularly on the balance sheets of NBFCs, and worse, the balance sheets of individuals, which we may never see..

CO:RELATIONS

Regulatory Concerns About Artificial Intelligence

Financial markets around the world are vulnerable. ‘Risks to financial stability’ keep most central banks and stock market regulators awake at night. The International Monetary Fund’s latest Global Financial Stability Report, to be published today, has a chapter that warns about the impact of artificial intelligence (AI) on capital market activities. While efficiencies can reduce financial stability risks by effectively monitoring risk management processes and market liquidity, new risks could emerge. These include increased market speed and volatility in stressful situations, opacity in the operations of NBFCs and dependency on third-party AI service providers. Then there could be problems related to cyber-security. 

RBI governor Shaktikanta Das recently warned that the heavy reliance on AI can lead to concentration risks, especially when a few tech providers dominate the market. “This could amplify systemic risks, as failures or disruptions in these systems may cascade across the entire financial sector,” he said in a speech titled ‘Central Banking at crossroads’. He mentioned ‘financial stability’ 13 times and the word ‘risks’ 11 times.

CORE NUMBER

Rs 9 lakh crore

This is the total quantum of market cap lost by all listed companies on the Bombay Stock Exchange (BSE) on Tuesday's trading, as the Sensex plummeted over 900 points and the Nifty fell below the 24,500 mark.  Investor confidence has been shaken by a combination of domestic and global factors.  Concerns over exaggerated valuations in the Indian market, coupled with unimpressive September quarter earnings, have triggered a sell-off. Foreign portfolio investors are also contributing to the outflow, further dampening market sentiment. The situation is also compounded by weak global cues and anxieties surrounding the upcoming US elections.

FROM THE PERIPHERY

— 💭 On Tuesday NBFC Bajaj Finserv announced that Allianz is considering exiting their life and general insurance joint ventures. While talks are still in the early stages and no formal proposal has been made to the board, according to Moneycontrol, Allianz has promised full support for a smooth transition to the Bajaj brand if it withdraws. Bajaj Finserv holds a 74% stake in both ventures, with Allianz holding 26%. Bajaj has developed two robust insurance businesses alongside Allianz, ensuring the interests of policyholders and stakeholders are safeguarded.

—📉 India’s push to boost its manufacturing sector by leveraging the US-China trade war has largely missed the mark, a new Oxford Economics study reveals. According to Business Standard, while India’s share of US imports grew by a mere 0.6% between 2017 and 2023, Vietnam surged ahead, increasing its share by 1.7%. Taiwan and South Korea also outpaced India by 1% and 0.7% respectively. Despite gains in electronics exports, India remains heavily dependent on Chinese components, with China accounting for 67% of imports in key sectors like semiconductors. 

—🤫 Fintech firm Paytm's parent company, One97 Communications, reported its first-ever net profit of Rs 930 crore in Q2 FY25, solely due to a one-time gain from the sale of its ticketing platform, Paytm Insider, to Zomato for Rs 2,048 crore in August. This masks the underlying financial performance of the fintech firm, which has been struggling to cope with the impact of RBI curbs on its payments bank business. Paytm's revenue from operations declined 34% year-on-year to Rs 1,659.5 crore, highlighting the challenges the company still faces. While the Zomato deal provided a temporary reprieve, it remains to be seen if Paytm can achieve sustainable profitability.

—💲 Quick commerce startup Zepto is reportedly in talks with the family offices of Ranjan Pai, chairman of the Manipal Group; Ramesh Juneja and Rajeev Juneja of Mankind Pharma; and Cipla for its fresh funding round. The Economic Times reported on Tuesday that Zepto is seeking a new funding round of US $100-US $150 million from Indian family offices and high-net-worth individuals. This news comes as Zepto is reportedly preparing for an IPO in India. Founded in April 2021, Zepto has rapidly gained ground in the competitive quick-commerce market, capturing a 22% market share as of January 2024. Zepto's latest fundraising efforts, totalling over US $1.2 billion in the last year alone, underscore the growing interest in the quick-commerce sector.

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