5 NBFC Stocks with Lowest NPAs

Non-banking financial companies (NBFCs) are crucial to India's financial system. They help bring credit to segments of the economy that are often underserved by the traditional banking system.

Many in this underserved segment lack access to formal credit, forcing them to rely on unorganised lenders who charge very high interest rates.

This is where the role of NBFCs comes in. They provide loans and financial services that integrate the underserved population into the formal financial system. It gives them access to credit at a lower cost, which helps in economic growth.

However, this comes with its challenges. Since these borrowers' incomes are highly dependent on economic conditions, any macro slowdown hurts their repayment capacity, which in turn hurts the asset quality of NBFCs.

That's why accessing asset quality, particularly non-performing assets (NPAs), is vital. It helps investors evaluate credit risk management, lending practices, and the quality of their lending books.

Strong asset quality often results in lower NPAs, while deterioration in asset quality leads to higher NPAs. From a financial perspective, high NPAs can have devastating effects, reducing profits and impacting long-term growth.

On the other hand, lower NPAs indicate a stable financial position, better risk management practices and a focus on quality lending. This makes them more reliable and able to manage economic challenges effectively.

Consequently, it is essential to consider NBFCs' NPA levels before making an investment decision.

In this article, we have covered the five NBFCs with the lowest NPAs in FY24.

#1 Arman Financial

First on the list is Arman Financial.

Armaan Financials offers lending services in the microfinance segment, supports micro, small, and medium enterprises (MSMEs), and offers two-wheeler loans. It has also recently entered the secured lending space, offering loans against property.

82% of its assets under management (AUM) comes from the microfinance segment, 14% from MSME loans, 3% from two-wheelers and the rest from business loans.

Coming to its financials, as of the financial year 2024 (FY24), its gross NPA (GNPA) stands at 2.9%, while its net NPA (NNPA) is just 0.3%.

A strong economic environment has supported asset quality. Arman's net interest margin (NIM) stands at 13.8%.

The company's net interest income (NII) has grown at a 26% compound annual growth rate (CAGR) to Rs 3,957 million (m) over the last five years.

Moreover, its profit grew at a 46% CAGR to Rs 1,736 m during this period. The strong profit growth has helped increase company's average return on equity (RoE) to 18.4%.

However, the company's financials have been severely impacted by rising delinquencies in the microfinance industry, as the economic slowdown hurt borrowers' repayment capacity.

As a result, its NNPA jumped from 0.2% in the first quarter of FY25 to 0.7% in the December quarter. This took a toll on its financials, as it turned red after its profit crashed 117% compared to last year.

Nevertheless, the company believes this is a temporary phase and will pass.

However, going forward, the company aims to diversify its business by reducing its dependence on the MFI book.

To this end, it plans to expand the SME portfolio so that the share of the SME book increases to 35%, and the share of the MFI book decreases to 60% from the current 82%.

The company trades at a price-to-book (PB) multiple of 1.5, a 55% discount to its 10-year median PB of 3.3.

Check out the Arman Financial fact sheet and quarterly results to know more.

#2 CreditAccess Grameen

Next on the list is CreditAccess Grameen.

CreditAccess Grameen is India's largest NBFC-MFI. Built on the Grameen microfinance model, the company primarily serves rural borrowers, who account for about 84% of its borrower base.

Despite serving the vulnerable section of society, the company has a strong asset quality. Its GNPA and NNPA stand at 1.2% and 0.3%, respectively, which has improved from 3.7% and 1.3% in FY22.

In terms of financials, the company's revenue has grown at a strong 25% CAGR to Rs 51,667 m, while its profit grew at 35% annually to Rs 14,459 m. Moreover, its RoE has averaged 13.7% during the period.

However, credit quality issues in the MFI segment affected CreditAccess's profitability in FY25, especially in the third quarter.

In response, the company took proactive steps by identifying risks early, creating provisions, and writing off bad loans. These steps pushed it into losses.

Nevertheless, the management is confident that the initial measures will safeguard its profitability in the coming quarters as growth rates normalize.

Going forward, the company plans to grow its gross loan portfolio to 20-25% between FY25 and FY28, with a NIM of around 12.9%. Its NIM in FY24 stood at 13%.

The company is entering new markets and expects its credit cost to increase from the current 2% due to higher provisioning and write-offs. Further, it plans to grow its unsecured personal loan portfolio to 10-15% of overall AUM by FY28, from 3% in FY24.

The company trades at a PB multiple of 2.3, a 34% discount to its 6-year median PB of 3.5.

Check out the CreditAccess Gramin fact sheet and quarterly results to know more.

#3 Five Star Business Finance

Next on the list is Five Star Business Finance.

Five Star is a south-based, non-deposit-taking, systemically important NBFC.

It targets small business customers and self-employed individuals who are largely cut off from the formal lending ecosystem.

The company disburses loans with a typical ticket size of Rs 3-5 lakh to borrowers in the Rs 25,000-40,000 income range.

Over 95% of the loans are secured against the borrower's assets - usually self-occupied residential property, allowing it to maintain asset quality over the years.

As of the financial year 2024 (FY24), its GNPA was 1.38%, while its NNPA was 0.63%, down from 0.69% last year.

Besides that, its NII has grown at a 25% CAGR to Rs 17,298 m over the last five years, while its NIM stands at 17.4%.

Moreover, its profit grew at a 26% CAGR to Rs 8,359 m during this period. The strong profit growth has also resulted in its RoE rising to 17.6%, up from 12.8% in FY22.

Going forward, the company has slowed down its disbursements in FY25 due to the rising asset quality in the micro-finance industry. Consequently, it lowered its AUM growth guidance from 30% to 25% in Q2FY25, which crashed its share price.

Yet, despite this, its financial position remains strong. Its profit in the December quarter grew 26% compared to last year. Its GNPA stood at 1.63% and NNPA at 0.81%.

The company trades at a PB multiple of 3.6, a 20% discount to its 2-year median PB of 3.5.

Check out the Five Star Business fact sheet and quarterly results to Know more.

#4 Poonawalla Fincorp

Next on the list is Poonawalla Fincorp.

Poonawalla Fincorp (erstwhile Magma Fincorp) is backed by the Cyrus Poonawalla Group. It focuses on acquiring prime and super prime customers, with no new to credit customers.

The company's low borrowing cost due to strong cash-rich promoter enables it to target this segment, which in turn helps it maintain strong asset quality. It's secured:unsecured AUM mix is ??49:51.

Poonawalla's asset quality has been steadily improving, with its GNPA improving from 3.2% in FY22 to 1.18% in FY24. On the other hand, its NNPA declined from 1.3% to 0.69%.

Besides, its NII has grown at a 12% CAGR to Rs 21,587 m over the last five years, while its NIM stands at 11.1%.

Moreover, its profit grew at a 40% CAGR to Rs 16,512 m during this period. The strong profit growth has also resulted in its RoE rising to 20.4%, up from 4.9% in FY22.

However, Poonawalla, like many other NBFCs, has been struggling with problems in unsecured lending. As a result, its stock price has fallen recently as its profits have been eroded due to higher provisioning in the short-term personal loan book.

Going forward, it aims to grow its AUM and profitability at 35-40% and 30-35% CAGR, respectively, with best-in-class asset quality: GNPA of 1.3-1.8% and NNPA of 0.5-0.9%.

The company aims to be among the top 3 NBFCs in the consumer and MSME segments.

It trades at a PB multiple of 2.8, 18% lower than its 5-year median PB of 3.4.

Check out the Poonawalla Fincorp fact sheet and quarterly results to know more.

#5 Manappuram Finance

Next on the list is Manappuram Finance.

Manappuram Finance is India's second-largest gold loan lender, with a pan-India reach.

It derives 51% of its total AUM from gold loans, while 49% comes from its non-gold portfolio.

This focus on gold loans has helped Manappuram maintain strong asset quality, as seen in its FY24 GNPA and NNPA of 1.9% and 1.7%, respectively.

Talking about financial performance, the company's revenue has grown at a CAGR of 16% to Rs 88,480 m in the last five years, while profit has grown at a CAGR of 8% to Rs 21,887 m. Its RoE has averaged 20% during this period.

However, its microfinance subsidiary, it, faces asset quality challenges due to rising provisions and bad loans.

As a result, the NPA doubled to 2.5% in Q3FY25 compared to last year. RBI also banned it from disbursing new loans until it lifted the ban last month.

These issues have impacted Manappuram's overall performance, with GNPA and NNPA rising to 2.5% and 2.3%, respectively.

Consequently, the profit fell 52% to Rs 2,785 m, even though NII grew by 5% to Rs 16,344 m.

Going forward, the gold business remains the main driver of growth. Rising gold prices and growing customer demand are expected to drive 15-20% annual growth in this segment.

Manappuram is also expanding its secured loan portfolio, especially in vehicle and home loans, which will help it diversify. Further, due to the economic challenges, it is reducing its lending operations as borrowers face repayment issues.

It trades at a PB multiple of 1.3, a 32% discount to its 10-year median PB of 1.9.

Check out the Manappuram Finance fact sheet and quarterly results to know more.

Conclusion

NPAs are a key indicator of a financial institution's loan portfolio quality. High NPAs often reflect underlying asset quality issues that can erode profitability and weaken the company's financial health.

On the other hand, low NPAs reflect stringent risk management practices that help manage credit risk and maintain financial stability.

However, NPA levels are directly related to the macroeconomic environment - ??strong economic growth usually leads to lower NPAs, while a slowing economy can lead to higher NPAs.

Since NBFCs primarily serve underserved and weaker sections of society, they remain vulnerable to asset quality challenges during economic downtrends.

This is why NBFCs with low NPAs can offer investors a sense of security, as they demonstrate good lending practices and resilience in challenging times.

Nonetheless, to make informed decisions, it's crucial to assess the company's fundamentals, including its financial performance, corporate governance practices, and growth prospects, rather than relying solely on the hype.

Happy Investing.

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