NBFC debt worth Rs 18 lakh crore to become dearer by 85-105 bps: CRISIL Ratings

While overall profitability of non-banking financial companies (NBFCs) -- including housing finance companies but excluding government owned NBFCs – is expected to remain steady on the back of reduced credit costs, the borrowing costs for such entities could rise between 85 and 105 basis points (bps) in the current fiscal.

According to CRISIL Ratings, credit costs, which have been rising for the past couple of years, should decline this fiscal because most NBFCs hold substantial provisioning buffers, which would offset some of the impact of higher interest rates on profitability.

“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 (approximately) 165 bps,” stated a release by the ratings major.

An analysis of NBFCs by the ratings major showed that Rs 15 lakh crore of debt, or around 65 per cent of outstanding debt as on March 31, 2022, is due for repricing this fiscal owing to interest reset or maturity.  

Further, another around Rs 3 lakh crore of incremental debt is likely to be raised to support expected growth in lending.

The impact of this will vary based on the mix of fixed and floating-rate borrowings in NBFC portfolios, as per CRISIL Ratings.  

The ratings major highlighted the fact that while earlier transmission of such rate changes made by the RBI used to happen with a lag, now with bank floating loans 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. At the same time, interest rates on repo-linked bank facilities do reflect such changes very quickly,” said Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings.

“Extrapolating that, and after baking in the total (approx) 165 bps hike likely in the repo rate this fiscal, we see the overall cost of borrowings for NBFCs rising 85-105 bps,” he added.

Meanwhile, in home loans that constitute 35-40 per cent of assets under management, NBFCs should be able to pass on the higher rates to both existing and new clients since lending rates in this segment 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, it added.

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

“This squeeze will be offset by the substantial provisioning buffers built over the past two fiscals, which had cranked up their credit costs,” said the release.

“Last fiscal, many NBFCs had released their provisioning buffers partially, which had reduced their credit costs. There is still a reasonable amount of cushion available — 0.5 per cent to 2 per cent 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,” said Ajit Velonie, Director, CRISIL Ratings.

In addition to substantial provisioning, what will support the credit profiles of most NBFCs this fiscal is adequate liquidity and improved capitalisation, said the release while adding that the stage seems set for higher disbursements and credit growth amid improving macro-economic landscape after the COVID-19 pandemic.

That said, future waves of the pandemic, geopolitical issues, and a sharper-than-expected increase in interest rates will bear watching, it added.