Non-banking finance companies (NBFCs) in India are facing the heat as borrowing costs surge due to a rise in yields. Despite the challenges, corporate bonds remain the primary avenue for these companies to raise funds, given the robust demand for credit and limited alternative options.
Given the RBI’s concerns about the growing exposure of bank credit to non-banking finance companies, non-bank lenders may be reluctant to borrow funds through bank loans. As of August 25, bank loans to non-bank lenders had surged by 26% year-on-year to Rs 13.83 lakh crore.
In this challenging scenario, non-bank finance companies are expected to bear the burden of rising borrowing costs and continue to raise funds through bonds. However, this may put pressure on their net interest margins in the short term. The competition in the secured lending space from banks and small finance banks is expected to limit the complete pass-through of higher borrowing costs in Oct-Mar, possibly leading to a margin compression of 20-25 basis points in 2023-24, as per India Ratings. Smaller non-banking finance companies are likely to be the most affected by this rise in costs.
In the fiscal year 2022-23 (Apr-Mar), companies and financial institutions raised a substantial Rs 8.7 lakh crore through corporate bonds. Non-bank lenders constituted a significant portion of this borrowing at 32.3%, with public sector companies at 20.8% and housing finance companies at 18.3%, according to the RBI’s latest financial stability report.
Costlier borrowing
To maintain their growth, non-bank lenders will continue to rely on bond market financing, though borrowing through commercial papers (CPs) has become costlier after the RBI’s announcement of open market operations, with rates on CPs issued by non-banking finance companies increasing by 20 basis points to 7.55-7.75%. This rise in cost exceeds the 10-15 basis point increase seen on medium and long-term corporate paper. Fear of further OMO sales and increased currency circulation before the festival season are expected to keep liquidity tight and CP rates high. NBFCs are expected to report loan growth of 15-16% in 2023-24 (Apr-Mar), according to a report by India Ratings. Overreliance on short-term debt instruments is seen as risky due to the potential for asset-liability mismatch.
While AAA-rated non-bank lenders might manage to secure funds at a higher cost, those rated AA- and below could face challenges and may even postpone their borrowing plans. Spreads between government bonds and AAA-rated corporate bonds are predicted to widen by 5-10 basis points, with shorter-term bonds experiencing more pronounced spread widening.
Yields on corporate bonds have eased slightly, now ranging from 7.75-7.80% across various tenures. However, concerns about OMO sales and global market sentiment are expected to keep corporate bond yields elevated for at least six months.
