Investors dump NBFC stocks, shift money to banking ones amidst RBI fears

ILLUSTRATION: AJAY MOHANTY

Investors on Wednesday dumped stocks of non-banking financial companies (NBFCs) and moved their money to bank shares amid fear of a broader crackdown on the sector by the Reserve Bank of India (RBI).

The concern was stoked by the central bank’s action against IIFL Finance, JM Financial, and Paytm Payments Bank, citing lapses in their operations.

Shares of IIFL Finance hit their 20 per cent lower limit for a second day after the RBI this week asked the company to stop sanctioning or disbursing gold loans following the detection of “material supervisory concerns”.

After dropping 20 per cent intra-day, JM Financial recouped some losses to end 10.7 per cent lower after the RBI found deficiencies in loans sanctioned. The losses were not restricted just to these two NBFCs. Of the 43 NBFC stocks with a market capitalisation of more than ~10,000 crore, 34 declined in Wednesday’s trade. Some of the biggest declines were in Capri Global Capital (14.3 per cent), L&T Finance Holdings (7.2 per cent), and Manappuram Finance (6 per cent).

Banking stocks, on the other hand, gained with the Nifty Bank index rising 0.8 per cent.

The gain in banking majors like Axis Bank, which rose 2.3 per cent, and Kotak Mahindra Bank, which went up 2.5 per cent, helped the Sensex and Nifty 50 hit record highs.

Analysts said investors feared surveillance would likely spread, and more might face regulator action. “We believe these punitive actions will impact systemic growth for NBFCs in the near term but will hopefully curb unethical business practices, avert systemic collapse as seen in the past, and enhance stakeholder confidence in the long run. Given the different customer profiles of NBFCs, we believe that the benefit, if any, for banks will be limited from the IIFL fallout,” a note by Emkay Global said.

Investors are shifting money to banking stocks because the valuations of some of the heavyweights are reasonable, given their recent underperformance, said analysts.

“Banks, especially heavyweights, underperformed in recent years. There is a consensus that banks will lead the next leg of the rally in equities. Moreover, the banking sector is seeing higher credit growth and improved asset quality. Industry tailwinds are there, and bargain buying due to issues in NBFC has given a fresh fillip to buy banking stocks,” said Chokkalingam G, founder of Equinomics.

In January, Securities and Exchange Board of India Chairperson Madhabi Puri Buch was concerned about some investment bankers inflating subscription figures in initial public offerings. Sources said Sebi action against some banks was expected soon.

Correction in NBFC stocks is likely to continue for another few weeks, said Chokkalingam, adding it might bottom out if surveillance measures did not extend to other firms.

“Even if they do (extend to other firms), if the RBI does not find any serious lapse, NBFC stocks will start recovering. Investors should wait and watch how this unfolds and keep an eye on valuations,” said Chokkalingam.

First Published: Mar 06 2024 | 6:58 PM IST

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