Non-banking finance companies are expecting up to 30 basis points rise in their borrowing cost in next financial year as they expect the Reserve Bank of India to hike repo rate in its April Monetary Policy Committee meeting by 25 basis points, industry players said.
While the non-banking finance companies (NBFCs) will be able to pass on the rate hike to borrowers in case of external benchmark-linked loans, they will struggle passing the same in fixed rate loan products such as vehicle and MSME loans, they add.
“…For the mid-sized non-banking financial institutions, borrowing cost may go up between 10 bps-25 bps at the aggregate level in FY24. The direct borrowing cost is marginally higher when you are borrowing from primary market,” says Jugal Mantri, executive director and chief executive officer at Anand Rathi Global Finance.
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“Similarly, if you are having back-to-back line of credit, any change in the repo rate will have direct consequences for non-bank lenders who avail bank loans,” he added.
In its FY24 outlook for the NBFC industry, India Ratings & Research had said that till now there has been a stable funding environment for the NBFCs due to efforts undertaken by the RBI and the Centre.
The NBFCs migrated to bank loans for funding on account of hardening of bond yields. However, now that the marginal cost of funds-based lending rate has also moved up, the NBFCs have started mobilising funds from capital markets.
“In a nutshell, India Ratings believes the NBFCs will have to judiciously manage margins in FY24, given elevated borrowing cost and limited flexibility in passing over rate hikes in a select few segments, considering competition from banks and cautious approach over instalment burden on ultimate customers,” the rating agency said.
As per Umesh Revankar, executive vice chairman of Shriram Finance, the borrowing cost will rise temporarily and then may come down.
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“On an overall basis, I expect 25 basis points to 30 basis points increase in borrowing cost for FY24. We shall focus on retail deposits and bank funding as the demand for priority sector lending to remain high. We would be able to pass on increase in rate hike and maintain the margins,” he said.
Shriram Finance has a diversified borrowing profile of Rs 1.53 trillion as on December end. Of this, term loans account for the largest chunk of 27%, deposits form 22.5%, while 21% of the NBFC’s borrowings are from non-convertible debentures, among others.
“As an organisation, there has been no major change in our cost of debt so far. Certainly our borrowing cost has increased but as our borrowing is MCLR based, this increase is much less than the increase in repo rate. As a company, we have decided not to pass this increase to our borrowers and have taken a hit on our margins,” says Rahul Mehrotra, Managing Director and CEO of Religare Housing Development Finance Corp.
“Going forward, in the next financial year, there is scope for a rate hike of hardly 25 basis points considering the current economic indicators .In case the RBI hikes repo rate by 25 bps, there could be around a 10 bps-12 bps incremental rise in the bank’s MCLR, which might ultimately get passed onto us,” he added.
The central bank has raised repo rate cumulatively by 250 basis points since the beginning of rate hike cycle in May 2022. In its February MPC policy, two external members of the central board of the RBI voted against further rate hikes, citing growth concerns.