NBFC borrowing costs seen rising 85-105 bps: Crisil

With the Reserve Bank of India (RBI) raising policy rates two times in just over a month, borrowing costs for non-banking financial companies (NBFCs) are seen rising by 85-105 basis points in the current financial year, Crisil Ratings said in a report.

While NBFCs should be able to pass on higher rates to home loan borrowers since lending rates are typically floating in nature, they will be unable to pass on entire borrowing costs due to competition from banks, Crisil said. Other segments such as vehicle finance and MSME financing typically have fixed-rate loans, so only new loans would be charged at higher interest rates.

NBFCs are likely to face borrowing cost of 7.2%-7.4% in FY23, compared to 6.4% last year. However, the borrowing cost will be around 50 basis points lower compared to the pre-Covid level, an analysis by Crisil shows.

The impact of the rising borrowing cost will vary depending on the mix of fixed and floating rate borrowings of NBFCs. Of the total debt maturing in FY23, 42% is based on floating rates such as treasury bills, marginal cost of funds-based lending rate and repo-linked rates. NBFCs have a higher share of MCLR-linked loans compared to housing finance companies (HFC), the agency said.

The transmission of rate changes now takes place at a faster rate as floating loans are externally benchmarked to the repo from October 2019.

A total of Rs 15 trillion in debt is due for repricing in FY23 due to interest reset or maturity. An additional debt amount of Rs 3 lakh crore is likely to be raised by NBFCs to support the expected growth in lending.

gOur study shows increases or decreases in MCLR over the past five fiscals have not kept pace with changes in the repo rate. At the same time, interest rates on repo-linked bank facilities do reflect such changes very quickly. Extrapolating that, and after baking in the total 165-bps hike likely in the repo rate this fiscal, we see the overall cost of borrowings for NBFCs rising 85-105 bps,” Krishnan Sitaraman, deputy chief ratings officer, Crisil Ratings said.

Despite rising borrowing costs, the overall profitability of NBFCs is expected to remain steady, aided by a fall in credit costs, as NBFCs have made additional provisioning buffers in the Covid period, the report said.

gLast fiscal, many NBFCs had released their provisioning buffers partially, which had reduced their credit costs. There is still a reasonable amount of cushion available ― 0.5% to 2% of assets ― as contingency provisioning. That means incremental provisioning would be lower. Consequently, profitability is likely to be nearly stable this fiscal compared with last,” Ajit Velonie, director, Crisil Ratings, said.

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