Viral Shah’s Top Picks: 3 NBFC Stocks to Watch Out for!

Viral Shah, Vice President at IIFL Securities, expressed optimism about certain stocks in the Non-Banking Financial Company (NBFC) sector, particularly those involved in Microfinance Institutions (MFIs). He noted a trend of MFIs reducing interest rates, with Spandana Sphoorty Financial Ltd. already announcing rate cuts.

Shah highlighted the attention from regulatory authorities, including the Reserve Bank of India (RBI), towards addressing the issue of high interest rates in the MFI segment. He mentioned that several NBFCs, especially those focused on MFIs, are expected to follow suit with rate reductions in the coming quarters.


Among the companies expected to implement rate cuts are those with significant exposure to rural areas and those offering small-ticket loans. Shah emphasized that the rate cut trend is observed across various MFIs and is likely to continue in the foreseeable future.

The impact on NIMs and profitability will be gradual over the next few years, as the loans are typically fixed for two to three years. Analysts and investors have already factored this into their projections. The extent of the impact may vary depending on the size of the rate cut, but it should be manageable for most MFIs.

NBFCs with a focus on rural areas, such as Chola, Shriram, and Mahindra, are expected to benefit. We also prefer corporate-backed or triple A rated NBFCs, as they stand to benefit from rising spreads compared to smaller NBFCs.

We don’t actively cover housing finance companies, but we see increased competition in the affordable housing segment. Larger HFCs and some smaller ones are entering this space, potentially increasing competitive intensity.

What should investors watch out for in the medium term?

We believe that all MFI lenders will eventually have to cut rates, which may affect their performance. In the medium term, we prefer Chola Finance due to its growth prospects and earnings potential surpassing asset under management (AUM) growth.

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