Non-banking financial companies (NBFCs) may have to rely more on bank borrowings and other funding sources as the latest change in rules could slow the pace of mutual fund investment in debt instruments issued by NBFCs.
These lenders will tap other funding avenues like non-convertible debenture issues, bank borrowings and alternative investment funds, say experts.
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“NBFCs have a well-diversified borrowing mix, with borrowings from MFs constituting 5-7%, which can be replaced by other forms of borrowings. In fact, over a medium term, more money can directly flow to corporate bonds instead of the MF route,” Abhay Bhutada, managing director, Poonawalla Fincorp, said.
On Friday, the government announced that the indexation benefit for investments into debt mutual funds held for over three years would be removed from April 1. This is expected to result in a lower post-tax return for investors, lowering their motivation to hold money in debt funds for longer durations, which may dent the demand for such funds, say experts.
“To attract more investors to debt funds, higher returns may be necessary, but this could lead to an increase (could be up to 50 bps) in borrowing costs for NBFCs. This may result in a demand-supply mismatch for those lenders,” Parry Singh, founder and chief executive officer, Red Fort Capital, said. “Overall, the reduction in liquidity in debt mutual funds could have varying effects on the borrowing costs of NBFCs, depending on factors such as creditworthiness, availability of credit from other sources and the current interest rate environment.”
In recent months, non-bank lenders have seen a rise in their borrowing costs with the Reserve Bank of India looking to remove excess liquidity from the financial system.
According to experts, NBFC borrowing costs could rise by as much as 30 basis points in 2023-24 (April-March).
Typically, debt funds invest in non-bank lenders who are rated ‘AA’ and above. These lenders are expected to see a further rise in borrowing costs due to the removal of the indexation benefit, say bankers.
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“The quantum of issuances in the 3-5-year tenures may see lower demand from mutual funds in near future as fresh inflows in these categories of debt mutual funds will be impacted. We do not, however, see this materially impacting our financing plans. HDFC has diverse sources of financing, across products, markets, and tenures,” a spokesperson from Housing Development Finance Corporation said. “Till the time incremental flows in long-term debt funds resume, NBFCs may resort more to bank loans for their funding requirement. However, shorter-term borrowings requirements by NBFCs will continue to be funded by market issuances, where a large portion of the demand is from mutual funds.”