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The Great Indian NBFC Bubble Has Burst... But You Will Still Receive These 'Safe NBFC' Recommendations from Us - Views on News from Equitymaster

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The Equitymaster Research Digest

The Great Indian NBFC Bubble Has Burst... But You Will Still Receive These 'Safe NBFC' Recommendations from Us
Dec 6, 2016

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It was just a few months back that everyone wanted stocks of non-banking financial companies (NBFCs).

No doubt NBFCs have come into their own over the past three years. The RBI has offered them some regulatory advantages over banks. The companies have more capital and wider reach. And most importantly, they have found their niche.

No longer just a substitute for banks, some NBFCs specialize in home loans, others in gold loans or vehicle loans, and yet others in loans for micro businesses. This niche presence has helped them grow their loan books multifold. Some even enjoy an asset quality at par with the best banks. NBFCs anyways enjoy lending margins far superior to banks.

It's no wonder they caught everyone's fancy. In fact, between 2013 and 2016, the top NBFCs saw their valuation multiples move up three to eight times.

We started to warn WrapUp readers about the risk in NBFC valuations a few months back...

  • Stocks of NBFCs were an obscure lot until just three years back. Their traded volumes then were a fraction of what they are today. Not only have they been 'discovered' by the FIIs, fund managers, and brokers. They've enjoyed an impressive re-rating in valuations. Yet, the media still can't get enough. And lay investors are being drawn to the fast-moving stocks like a school of fish to an edible spinner!

    This is not to say that the growth opportunity in NBFCs is over. But investors willing to pay ten times the book value of a financial entity have already priced in obscene and nearly impossible growth rates.

    Following the herd's cravings for NBFC stocks will only make it more difficult to fetch the expected returns. And irrespective of the popularity of the stocks in the years to come, they may never fetch mammoth returns if you buy at the current steep valuations.
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