With the Reserve Bank of India (RBI) raising policy rates twice in just over a month, borrowing costs for non-bank financial corporations (NBFCs) are expected to increase by 85 to 105 basis points over the next month. current fiscal year, Crisil Ratings said in a report.
While NBFCs should be able to pass on higher rates to home borrowers, since lending rates are generally floating in nature, they will not be able to pass on the full cost of borrowing due to the competition from banks, Crisil said. Other segments such as vehicle finance and MSME finance usually have fixed rate loans, so only new loans would be charged at higher interest rates.
NBFCs are expected to face a cost of borrowing of 7.2% to 7.4% in FY23, compared to 6.4% last year. However, the cost of borrowing will be around 50 basis points lower than the pre-Covid level, according to an analysis by Crisil.
The impact of the increased cost of borrowing 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, incremental cost of funds-based lending rate, and repo-linked rates. NBFCs have a higher share of MCLR-linked loans than housing finance companies (HFCs), the agency said.
The transmission of rate changes is now happening at a faster pace, as floating loans are externally referenced on the repo from October 2019.
A total of Rs 15 trillion of debt is to be revalued in FY23 due to interest reset or maturity. An additional debt amount of Rs 3 lakh crore is expected to be raised by the NBFCs to support the expected loan growth.
gOur study shows that increases or decreases in MCLR over the past five years have not kept pace with changes in the repo rate. At the same time, interest rates on bank facilities linked to repos reflect these changes very quickly. Extrapolating this, and after factoring in the likely full 165 basis point rise in the repo rate this fiscal year, we see the overall cost of borrowing for NBFCs increasing by 85 to 105 basis points,” said Deputy Director Krishnan Sitaraman. ratings, Crisil Ratings.
Despite rising borrowing costs, overall NBFC profitability is expected to remain stable, helped by lower credit costs as NBFCs built up additional provisioning buffers during the Covid period, according to the report.
Last year, many NBFCs had partially released their provisioning reserves, which had reduced their borrowing costs. There remains a reasonable amount of cushion available ― 0.5% to 2% of assets ― as a contingency reserve. This means that the incremental provisioning would be lower. Therefore, profitability is expected to be almost stable this fiscal year compared to the previous fiscal year,” said Ajit Velonie, Director of Crisil Ratings.