Muthoot Finance shares rose 3% following the Reserve Bank of India's (RBI) approval to open 115 new branches, which reflects the company's ambitious expansion strategy amid favorable market conditions. The gold loan-focused non-banking financial company (NBFC) reported a 26% year-over-year growth in net profit for the third quarter, with revenue from operations booming by 36%. The company's consolidated loan assets under management peaked at Rs 1.11 lakh crore as of December 2024.
With the RBI's directive, Muthoot Finance must also comply with adequate security arrangements for the gold jewelry it loans against, ensuring proper storage facilities and adhering to existing regulations.
Meanwhile, other NBFC stocks experienced significant gains, boosted by RBI's recent move to lower risk weights on bank loans to NBFCs and microfinance loans, unlocking more funds and enhancing credit flow to these institutions. L&T Finance surged 6.4%, Cholamandalam Investment and Finance saw its shares spike 5.12%, and Shriram Finance rose by 4.55%, reflecting investor confidence sparked by the RBI's actions.
This shift remedies the increase imposed last November, when the RBI had enforced an additional 25% risk weight on specific loans to NBFCs with lower ratings. Analysts are optimistic about the sentiment this creates for all NBFCs, as it suggests a stronger footing for lending following recent tight norms.
Avinash Singh, Senior Research Analyst at Emkay Global Financial Services Ltd, noted, "Overall, we see this move (in addition to the 25 bps repo rate cut earlier) as important signaling from the RBI... increasing comfort with growth in the NBFC sector after moderation due to previous actions." This is pivotal as lending had slowed since the tightened measures were enacted late last year.
Despite the positive outlook from the lowering of risk weights, Singh cautions about the cost of funds (CoFs) for NBFCs, stating they are unlikely to see significant improvements due to previous interest rate hikes and remaining overhead costs. Analysts at Motilal Oswal Financial Services echoed this sentiment, estimating only minor benefits from the new measures, predicting just a 0.5% to 1% rise in earnings for certain NBFCs as borrowing costs modestly decline.
The consensus among experts is clear: the RBI's latest action offers a lifeline to struggling NBFCs and signals possible recovery and growth within the sector. Stocks of well-positioned firms such as Cholamandalam and L&T Finance could see marginal benefits, as they hold larger proportions of non-priority sector lending bank borrowings, positioning them to capitalize on this regulatory easing.
Looking forward, both analysts predict the overall market sentiment may improve significantly, leading to increased lending and broader economic impacts. This pivot could encourage greater investment interest from banks and institutional investors, driving growth within the Indian financial system.
Investors remain advised to monitor these developments closely, acknowledging the nuanced shifts within the sector, as the broader economic indicators will greatly influence the performance of NBFCs moving forward.
These developments encapsulate RBI's strategic approach to invigorate the economy, signaling potential growth avenues for the flourishing non-banking financial sector, which plays a pivotal role within India's financial ecosystem.