Rs 18 lakh crore NBFC debt set to become dearer by 85-105 bps this fiscal

New Delhi [India], June 14 (ANI): Borrowing costs for non-banking financial companies (NBFC) are expected to become costlier by 85-105 basis points in the current financial year due to an increase in policy rates by the Reserve Bank of India (RBI), CRISIL Ratings said in a report released on Tuesday.
However, the overall profitability of NBFCs is expected to remain steady cushioned by a reduction in credit costs.
Credit costs, which have been rising for the past couple of years, should decline this fiscal because most NBFCs hold substantial provisioning buffers. That should offset some of the impacts of higher interest rates on profitability.
A CRISIL Ratings analysis of NBFCs it rates shows Rs 15 lakh crore of debt, or 65 per cent of outstanding debt as on March 31, 2022, is due for repricing this fiscal owing to interest reset or maturity.
Another Rs 3 lakh crore 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 Ratings said.
The impact of this will vary based on the mix of fixed and floating-rate borrowings in NBFC portfolios. Earlier, the transmission of such rate changes made by the RBI used to happen with a lag. However, with bank floating loans now benchmarked to external gauges such as the repo since October 2019, the pass-through is relatively quicker compared with loans linked to the marginal cost of funds-based lending rate (MCLR).
"Our study shows increases or decreases in MCLR over the past 5 fiscals have not kept pace with the changes in the repo rate," said Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings Ltd.
"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," Sitaraman added.
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 are primarily floating in nature. But this rise won't be to the same extent as the increase in borrowing costs, amid intensifying competition from banks.
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, CRISIL Ratings noted in the report. (ANI)