The borrowing cost for lower rated non-banking finance companies (NBFCs) is expected to reduce by the end of current financial year, India Ratings said on August 5, a day before the Reserve Bank of India shares the outcome of its bi-monthly policy review.
“NBFCs that rely more on bank funding will more gradually benefit due to the slower transmission of rate cuts through the marginal cost of funds-based lending rate,” India Ratings said in a release.
The ratings agency added that the higher rated NBFCs’ borrowing cost lowers immediately, as they rely more on capital market funding. This is because as soon as rate cuts happens it transmits in the money market instruments with a quick pace.
After the start of the rate-cut cycle by the RBI, corporates are seen tapping the bond market to avail funds at cheaper rates and reduce the borrowing cost on the book.
Since February, the central bank has reduced key repo rate by 100 basis points (bps), leading to over 50-60 bps fall in rates on corporate bonds and commercial papers.
On the lending front, the ratings agency said NBFCs are likely to be selective in passing on the reduced costs to borrowers, which will help support their margins.
Funding could remain tighter for digital lenders, where rate cut benefit will not be passed on until there is meaningful recovery in asset quality trends for those operating in unsecured segment, the ratings agency said.
On the banking front, the system-wide SMA ratio for unsecured retail would be a key monitorable as banks aim to increase lending to this segment.
The SMA ratio for unsecured retail has been steady in the 7-8 percent range over FY23-FY25.
The ratings agency also expects net bank's interest margins to moderate in FY26 due to a lag in deposit repricing following 100 bps rate cuts, especially as 62 percent of the banking system loans are linked to the External Benchmark Lending Rate (EBLR).
The adjustment will happen in Q2 for banks, considering the strength of the liability franchise, the rationalisation on term deposit rates and the savings rate cut across buckets, India Ratings said.
Lower rated NBFCs are those with lower credit ratings, typically in the the AA and below categories. The RBI has a four-layered regulatory framework for shadow banks, based on their size, activity, and risk. These are base layer or the lower-rated. middle layer, upper layer and top layer NBFCs.
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