Borrowing costs

NBFCs could face pressure from NIM as borrowing costs set to soar

By Shashank Didmishe

Non-bank financial corporations (NBFCs) will face higher borrowing costs as the central bank raises policy rates after two years to fight inflation.

With rising interest rates, NBFC net interest margins (NIMs) could be under pressure, said Krishnan Sitaraman, Senior Manager and Deputy Head of Ratings at Crisil. “However, in many segments they will be able to pass on a reasonable share of the interest rate increase to their customers. they may have difficulty passing on the higher cost of borrowing, hence a likely decline in their market share in these segments,” he said.

The trend on NIMs was mixed for NBFCs in Q4FY22. While margins increased for affordable housing companies on a sequential basis in Q4FY22, major NBFCs experienced NIM compression, according to data compiled by Kotak Institutional Equities. NBFCs have been guided to absorb the first part of rising funding costs as current NIMs are above their long-term averages, the brokerage said.

Despite rising borrowing costs, NBFCs are optimistic that loan growth will remain robust, driven by recovering demand in both rural and urban areas.

There will always be challenges, but a recovery in new vehicle sales is expected as investment activity and government outlays in the economy increase while demand for used vehicles continues to rise. be robust, said Umesh Revankar, Vice President and Managing Director of Shriram Transport Finance. .

Similarly, the managing director of Muthoot Finance, George Alexander Muthoot, expects the government to pressure capital spending to support domestic economic activity. “We are optimistic that with the recovery in urban and rural demand, there will be a recovery in demand for gold loans in the industry over the coming quarters,” he said.

While some NBFCs may be able to pass on higher costs to their customers, they will also use other means such as rapid scanning to improve operational efficiency and linkages with banks to reduce costs, Sitaraman said. by Crisil.

“They will also try to reduce credit costs given the increase in provisions they have taken over the past two years. These measures should help support their profitability levels,” he said.