Tighter interest rates are likely to increase the cost of funds for financial companies by 85 to 105 basis points (bps) as their debt of Rs 18 trillion is repriced over the course of the current fiscal year, according to Crisil Ratings.
However, the overall profitability of non-bank financial corporations (NBFCs) is expected to remain stable. amortized by a reduction in credit costs. Credit costs, which have been rising in recent years, are expected to plunge this fiscal year as most NBFCs hold large provisioning buffers. This should offset some of the impact of higher interest rates on profitability.
An analysis of NBFCs under Crisil’s rating radar showed that Rs 15 trillion of debt as of March 31, 2022 needed to be rerated for this financial year due to interest reset or maturity. An additional Rs 3 trillion 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 increase expected for this fiscal year to around 165 basis points,” Crisil said.
As for the passing on of increased costs to customers (borrowers), CRISIL stated that the increase may not be of the same magnitude as the increase in borrowing costs (85-105 basis points), in a context of intensified competition from banks.
In real estate loans (constituting 35 to 40% of assets under management [AUM]), NBFCs should be able to pass on the higher rates to both existing and new customers, as lending rates here are mostly floating in nature.
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 increased borrowing costs.
As a result, raw NBFC spreads will compress by 40 to 60 basis points in this fiscal year. This compression will be offset by the large provisioning reserves built up over the past two years, which have pushed up their borrowing costs, he added.