Mumbai: Non-banking finance companies , which depend on banks for funds, may see an increase in borrowing cost over the next few quarters amid a surge in demand and tightening monetary conditions.
Japanese brokerage Nomura Securities expects cost of funds for NBFCs to increase by 30-40 basis points by December 2023 due to a broad increase in markyields, higher benchmark bank rates and because non-convertible debentures (NCDs) issued by NBFCs will be priced at a more expensive yield.
Nomura analysts Ajit Kumar, Param Subramanian and Ankit Bihani said there has been a 10-15 basis point increase in yields across buckets since the first quarter of the current fiscal and NBFCs with maturing NCDs will also be hit by at least a 100 to 200 basis points increase in yields as coupon rates for maturing NCDs are at a lower yield.
Further, bank loans, which constitute 44-57% of NBFC funding, are also likely to be repriced as lenders increase their benchmark marginal cost of funds-based lending rates (MCLR) this year.
“This cost of funds increase of 30 to 40 basis points during the first and third quarter of the fiscal is higher than the guidance given by most of the NBFCs and the average 20 basis points increase built into our current estimates. Hence, there could be around 1-5% risk to our FY24F EPS coming from pressure on CoF,” the Nomura analysts said.
Interest rates in the banking system have increased following a sharp 250-basis point increase in the benchmark repo rate by the Reserve Bank of India between May 2022 and February 2023. Last month, the RBI also asked banks to maintain a 10% incremental cash reserve ratio (ICRR) from August 12 as part of the central bank’s efforts to drain excess liquidity from the banking system following the withdrawal of Rs 2,000 currency notes, which tightened liquidity further.
On Friday, the RBI announced the withdrawal of I-CRR in a phased manner.
NBFC executives say that a tightening of rates is expected. “Liquidity is tight and banks will have to pay more for deposits. Naturally, they will hike their lending rates, so it is likely that the cost of funds will become more expensive. But the saving grace is that as a mortgage finance company, most of our loans are on a floating rate basis, so we can afford to pass it on to our customers,” said Gagan Banga, CEO, Indiabulls Housing Finance.
Others like Shriram Finance, for which a large part of the loan book is fixed rate vehicle finance, are also bracing for higher rates.
“Rates have gone up and it is safe to say it will not come down in a hurry. So we are watching how much of an impact it will have on our cost of funds because 20% of our borrowings is from banks and 24% is from fixed deposits,” said YS Chakravarti, CEO, Shriram Finance.
