Borrowing costs for non-banking financial companies (NBFCs) are seen rising 85-105 basis points (bps) this fiscal. However, overall profitability of NBFCs is expected to remain steady, cushioned by a reduction in credit costs with higher provisioning buffers of the past two fiscals to help lower credit cost, says a research note.
A CRISIL Ratings analysis of NBFCs’ rates shows Rs15 lakh crore of debt, or about 65% of outstanding debt as of 31 March 2022, is due for repricing this fiscal due to interest reset or maturity. Another Rs3 lakh crore of incremental debt is likely to be raised to support expected growth in lending.
"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," the report says.
According to the rating agency, the interest rate scenario has turned for NBFCs, with the Reserve Bank of India (RBI) hiking the repo rate by 90bps in two tranches and it expects another 75bps of hikes, taking the total expected to increase this fiscal to about 165bps.
The impact of this will vary based on the mix of fixed and floating-rate borrowings in NBFC portfolios, CRISIL says, adding, "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 quick compared with loans linked to the marginal cost of funds-based lending rate (MCLR)."
Krishnan Sitaraman, senior director and deputy chief ratings officer of CRISIL Ratings, says, "Our study shows increases or decreases in MCLR over the past five fiscals have not kept pace with the changes in the repo rate. At the same time, interest rates on repo-linked bank facilities reflect such changes very quickly. Extrapolating that, and after baking in the total about 165bps hike likely in the repo rate this fiscal, we see the overall cost of borrowings for NBFCs rising 85-105bps."
In home loans, which constitute about 35%-40% of assets under management (AUM), the rating agency feels NBFCs would be able to pass on the higher rates to both existing and new clients since lending rates here are primarily floating in nature. "But this rise will not be to the same extent as the increase in borrowing costs, amid intensifying competition from banks," it added.
Other segments, such as vehicle finance and micro, small and medium enterprises (MSME) financing, comprise major fixed-rate loans. So, only incremental loans would be charged at higher interest rates; here, too, they will not be as much as the rise in borrowing costs. Consequently, gross spreads of NBFCs will compress 40-60 bps this fiscal.
This squeeze, the rating agency says, will be offset by the substantial provisioning buffers built over the past two fiscals which had cranked up their credit costs (see the graph below).
According to Ajit Velonie, director of CRISIL Ratings, during the past fiscal year, many NBFCs had partially released their provisioning buffers which had reduced their credit costs.
"There is still a reasonable amount of cushion available — 0.5% to 2% of assets — as contingency provisioning. That means incremental provisioning would be lower. Consequently, profitability is likely to be nearly stable this fiscal compared with last," he added.
In addition to substantial provisioning, this fiscal, the credit profiles of most NBFCs will be supported by adequate liquidity and improved capitalisation. Add an improving macro-economic landscape after the COVID-19 pandemic and the stage seems set for higher disbursements and credit growth. That said, future waves of the pandemic, geopolitical issues and a sharper-than-expected increase in interest rates will bear watching, the rating agency concludes.