Foreign brokerage CLSA said while investors are excited over prospects of rate cuts translating into lower cost of funds for NBFCs, the reality is not so sweet. In its latest note on NBFCs, CLSA said less than 50 per cent of borrowings for most large NBFCs are at floating rates, the transmission of which happens with a lag of 1-12 months.
Besides, 20 per cent of NBFCs’ NCDs are maturing in FY24 in FY25 each – these NCDs bear coupon rates much below current levels, implying a refinancing hit. Also, the incremental cost of NCDs is unlikely to come off with repo rate cuts, as bond yields are already factoring in repo rate cuts, CLSA said.
The winner in a rate-cut environment would be SBI Card while the most negatively impacted NBFC in a rate-cut cycle would be LIC Housing, it said.
To recall, RBI hiked the repo rate by 250 basis points (bps) in the current rate hike cycle to 6.5 per cent. The 10-year GSec yield increased about 150 bps from the lows last year but moderated 30-40 bps in the past 3-4 months. T-Bill rates are up 250-30 bps from the lows while banks have increased MCLR by 150-170 bps since then.
CLSA noted that smaller NBFCs typically rely on bank borrowings for funding, as they are unable to access debt capital markets, due to lack of a strong credit rating. But as companies grow and achieve strong credit ratings, they typically diversify into capital market borrowings as those are usually cheaper than bank borrowings.
CLSA noted that the share of floating rate borrowings is highest for MFIs, gold financiers and SBI Card.
Most large NBFCs typically have 35-50 per cent share of borrowings from NCDs. CLSA's analysis of the maturity pattern of NCDs suggests that around 40 per cent of the outstanding NCDs will mature in the next two years. For some players, it would be as higher at 55-60 per cent.
"Simply put, refinancing these NCD borrowings by other NCD borrowings will result in a higher refinancing cost. Can NBFCs then refinance the maturing NCDs by bank borrowings? Yes, they could, but the refinancing cost would be even higher in that case," it said.
Bajaj Finance, SBI Card and LIC Housing Finance will see NCDs with sub-7 per cent coupon rate maturing in FY24, CLSA said.
On the other hand, CLSA said bank borrowing cost may fall but with a lag. It said large NBFCs like Bajaj Finance, LIC Housing Finance, Mahindra & Mahindra Financial and Shriram have less than 40 per cent share of bank borrowings. The only large NBFCs that have a high share of bank borrowings are SBI Card, Muthoot Finance and Cholamandalam Investment.
"Looking at companies only from the lens of cost of funds, the winner in a rate-cut environment would be SBI Card. This is because 65 per cent of its loans are at floating rates and at short repricing tenures. The asset book is at fixed rates. On the other hand, the most negatively impacted NBFC in a rate-cut cycle is LIC Housing. This is because 60-65 per cent of its borrowings are at fixed rates while 95 per cent of assets are at floating rates," CLSA said adding that its stock recommendations and top picks are based on a number of factors and not cost of funds alone.