Debt of non-bank financial corporations to rise in current fiscal year: report

NBFC borrowing costs are expected to get higher in the current fiscal year

New Delhi:

Borrowing costs for non-banking financial corporations (NBFCs) are expected to increase by 85 to 105 basis points in the current fiscal year due to an increase in the Reserve Bank of India’s (RBI) policy rates, a said CRISIL Ratings in a report. released on Tuesday.

However, the overall profitability of NBFCs should remain stable thanks to a reduction in credit costs.

Credit costs, which have been rising over the past two years, are expected to decline this fiscal year as most NBFCs hold substantial provisioning reserves. This should offset some of the effects of rising interest rates on profitability.

A CRISIL Ratings analysis of the NBFCs it assesses shows that Rs 15 lakh crore of debt, or 65% of outstanding debt as of March 31, 2022, needs to be reassessed for this fiscal year due to interest reset or l ‘deadline.

Another Rs 3 lakh crore of additional debt is expected to be raised to support expected loan growth.

The interest rate scenario has reversed for NBFCs, with the Reserve Bank of India (RBI) raising the repo rate by 90 basis points in two tranches.

“We expect an additional 75 basis points of increases, bringing the total expected increase for this fiscal year to 165 basis points,” CRISIL Ratings said.

The impact of this will vary depending on the mix of fixed rate and floating rate borrowings in NBFC’s portfolios. Previously, the transmission of these rate changes made by the RBI occurred with a lag. However, with floating bank loans now being benchmarked against external gauges such as repo since October 2019, the pass-through is relatively faster compared to loans linked to the marginal cost of funds-based lending rate (MCLR).

“Our study shows that increases or decreases in MCLR over the past 5 years have not kept pace with changes in the repo rate,” said Krishnan Sitaraman, Senior Director and Deputy Director of Ratings, CRISIL Ratings Ltd.

“At the same time, interest rates on repo-linked bank facilities reflect these changes very quickly. the overall cost of borrowing for NBFCs increasing by 85 to 105 basis points,” Sitaraman added.

In the case of home loans, which represent 35-40% of assets under management (AUM), NBFCs should be able to pass on the higher rates to existing and new customers, as loan rates are mostly floating in nature. . But this increase will not be of the same magnitude as the increase in borrowing costs, in a context of intensified competition from banks.

Other segments, such as vehicle finance and micro, small and medium-sized enterprise (MSME) finance, mainly include fixed rate loans. Thus, only the additional loans would be charged at higher interest rates and here too they will not be as high as the rising cost of borrowing. As a result, raw NBFC spreads will compress by 40 to 60 basis points in this fiscal year, CRISIL Ratings notes in the report.

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