Non-banking financial companies (NBFCs) are likely to see a compression in their net interest margins as RBI move to increase risk weights for consumer loans will lead to a rise in cost of funds.
“We see that there is an impact on capital of NBFCs, second level of impact would be on loan growth and third level of impact would be on margins,” said Jinay Gala, associate director, India Ratings and Research.
In its recent directive, Reserve Bank of India (RBI) asked non-banking financial companies (NBFC) to increase risk weight on unsecured retail loans to 125% from 100% earlier.
The directive has come as a jolt to many non-bank lenders, who in recent years, have ramped up their disbursement of unsecured personal loans in a bid to increase margins.
In a recent report, India Ratings and Research noted that the impact of the higher risk weights would dent the tier-1 capital of non-bank lenders by 250-300 basis points (bps).
Analysts see the higher risk weights are a “double whammy” as it will hamper loan growth in these segments if lenders opt to pass on the funding cost to borrowers.
Additionally, RBI has increased the risk weight on bank’s exposure to NBFCs by 25 percentage points applicable for loans classified under the non-priority category.
The move could also pose a challenge to NBFCs that have grown in size and scale as they would require to meet incremental demand for funding through the capital markets which have remained subdued with lower participation from mutual funds.
While larger and higher rated NBFCs have access to the capital markets, their smaller peers would bear the brunt of the move in the medium term, say experts.
Currently, banks account for 35-40% of overall NBFC borrowings. The latest RBI measure would prompt NBFCs to borrow more from the capital market at a higher cost.
“It is too difficult to quantify the impact on margins. One can only say that incremental cost of borrowings may go up by 25-30 bps. One needs to see as to what extent NBFCs would be able to pass this on to borrowers,” said Karthik Srinivasan, senior vice president, group head — financial sector ratings, ICRA.