Yields of some non-banking finance companies (NBFCs) are likely to get impacted on account of rising cost of funds. However, non-banks that are able to pass on higher borrowing costs might get some relief , market players said.
Although some NBFCs would be able to pass on the increase to borrowers in segments such as personal loans, two-wheeler loans and microfinance loans, they may face difficulties in competitive segments such as housing loans, and will have to absorb part of the rise in funding cost. The Reserve Bank of India (RBI), too, has cautioned NBFCs to be mindful of rising costs and competition from banks.
Cost of funds for NBFCs increased by 80-100 bps in FY23, as per data compiled by India Ratings. Cost of funds raised through bonds and NCDs substantially increased as the markets were factoring in potential rate hikes. In order to cope with rising costs, NBFCs are preferring banks borrowings.
The growth in bank borrowing of NBFCs was 26.4% as on September 30, compared with 11.5% a year ago and 16.7% a quarter ago, RBI data showed. In comparison, increase in debentures issued by shadow banks was at 2.2% as of September 30, compared to 8.4% a year ago and 2.4% a quarter ago. Bank lending to NBFCs increased 33% YoY in December to Rs 12 trillion, consisting of 9% of Rs 129-trillion non-food credit issued by banks.
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The impact of higher costs is less for larger NBFCs as they have maintained an equal funding mix. “We borrow money from a variety of sources depending on the source that gives us the best rate. For the quarter ended September 30, 2022, in terms of borrowings, term loans constituted 23%, ECB constituted 4%, debentures and securities constituted 42% and deposits were 31%,” Renu Sud Karnad, MD of HDFC, said.
Typically, bank borrowings are available at floating rates while funds raised from the market are available at fixed rates. Although market borrowings will reduce the cost of funds in short term, a drop in repo rates in future will reverse these gains, Anil Kaul, MD at Tata Capital Housing Finance, said.
With transmission of repo rate in the banking system coming through and the rates in the commercial paper and short-term bond markets being stabilised, large NBFCs would increase the proportion of CPs in the funding mix in near term, according to the ratings agency.
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“The current three-year bond yields to some extent are already pricing the next potential rate hike, while banks rates increase with a lag. This trend will go on for at least two-three quarters till the time the markets start to at least expect reversal in the interest rate cycle,” Udit Kariwala, CFO, Vastu Housing Finance, said.