NBFC profitability to remain stable amid 85-105 bps in funding cost: Crisil

Rs 15 trn debt as on March 31 is due for repricing in FY23 owing to interest reset or maturity. Another Rs 3 trn of incremental debt is likely to be raised to support growth in lending

The hardening of interest rates is likely to raise the cost of funds for finance companies by 85-105 basis points (bps) as their debt, amounting to Rs 18 trillion, gets repriced in the current financial year, according to Crisil Ratings.

However, overall profitability of non-banking finance Companies (NBFCs) is likely to remain steady. cushioned by a reduction in credit costs. Credit costs, which have been rising the past few years, should dip this fiscal as most NBFCs hold substantial 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 on March 31, 2022, is due for repricing this fiscal owing to interest reset or maturity. Another Rs three trillion of incremental debt is likely to be raised to support expected growth in lending.

The interest rate scenario has turned for NBFCs, with the Reserve Bank of India (RBI) hiking the repo rate by 90 bps in two tranches. “We expect another 75 bps of hikes, taking the total expected increase this fiscal to ~165 bps,” Crisil said.

As for passing on increase in cost to customers (borrowers), CRISIL said the rise may not be in same extent as the increase in borrowing costs (85-105 basis points), amid intensifying competition from banks.

In home loans, (constituting 35-40 per cent of assets under management [AUM]), NBFCs should be able to pass on the higher rates to both existing and new clients since lending rates here are primarily floating in nature.

Other segments such as vehicle finance, and micro, small and medium enterprises (MSME) financing, comprise fixed-rate loans majorly. So only incremental loans would be charged at higher interest rates and here, too, they won’t be as much as the rise in borrowing costs.

Consequently, gross spreads of NBFCs will compress 40-60 bps this fiscal. This squeeze will be offset by the substantial provisioning buffers built over the past two fiscals, which had cranked up their credit costs, it added.