Cost of funds of NBFCs climbs by up to 22 bps in April-June quarter

In the April-June quarter, most NBFCs reported a healthy net profit.

The cost of funds of non-banking finance companies (NBFCs) rose by up to 22 basis points (bps) on a quarterly basis during April-June following the increase in the cost of bank term loans, analysts said.

As per Moneycontrol analysis, the cost of funds of these entities on an annual basis surged sharply, up to 110 bps. One basis point is one-hundredth of a percentage point.

"The increase in borrowing costs is largely attributable to borrowings through bank loans. In this first quarter of FY24, we have seen the impact of the MCLR (marginal cost of funds-based lending rate) resets play out to an extent as a consequence of the repo rate hikes seen in the last fiscal," said Ajit Velonie, Senior Director, CRISIL Ratings.

Some analysts said the sharp on-year rise in the cost of funds is also due to the 250 bps rate hike by the Reserve Bank of India (RBI) since last year. "The impact of this rate hike was not witnessed in Q1 FY23, but the impact has been seen since Q2 FY23," said an analyst.

Most NBFCs have a higher dependence on bank term loans due to attractive interest rates in the market in a highly competitive market.

A term loan is given for a fixed duration of time, which may range from one year to as long as 30 years.

In Q1 FY24, those NBFCs that reported their quarterly results showed that of the total borrowings, up to 53 percent were from bank term loans.

However, an increase in rates on these instruments in the reporting quarter forced some NBFCs to marginally lower their dependence on bank term loans.

According to the RBI data, the average of the weighted average lending rates on outstanding rupee loans increased to 9.79 percent in April-June, compared to 9.66 percent in January-March.

Similarly, most banks also increased their MCLR rates in June.

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Which NBFC’s cost of funds rose?

The cost of funds of Bajaj Finance and Bajaj Housing Finance rose by 22 bps and 19 bps on-quarter, respectively. In the April-June quarter, Bajaj Finance’s cost of funds stood at 7.61 percent and Bajaj Housing Finance’s at 7.67 percent, according to the investor presentation.

While the cost of funds of L&T Finance rose by 6 bps, that of Shriram Finance climbed by 7 bps, Home First Finance increased by 10 bps, and Cholamandalam Investment and Finance Company surged by 11 bps.

All the rises were on a quarterly basis, except for Cholamadalam Investment and Finance Company. The company witnessed an 11-bps rise on a yearly basis.

Explaining this surge due to the increase in the cost of bank term loans, Velonie of CRISIL said historical analysis indicates that the increase or decrease in MCLR over the past four-five fiscal years did not keep pace with the changes in the repo rate and the impact was felt with a lag.

Will this impact profitability?

Analysts said that the increase in borrowing costs will have an impact on the net interest margins of the company, but profitability will not be impacted as credit costs will be lower this fiscal year since asset quality is expected to be benign.

"We don’t expect an impact on overall profitability as credit costs will be lower this fiscal, with asset quality expected to be benign. Hence, overall we expect the return on assets (RoA) to be stable this fiscal, despite the increase in borrowing costs," said Velonie.

However, some analysts believe the net profitability of NBFCs may be impacted by 20 bps.

"NBFCs will witness higher margin-related pressures vis-à-vis housing finance companies (HFCs). Net profitability of NBFCs for the whole year is expected to be impacted by up to 20 bps vis-à-vis FY2023 even as asset quality stabilises and hence credit costs remain under control," said Manushree Saggar, Vice President, ICRA.

In the April-June quarter, most NBFCs reported a healthy net profit on the back of sharp growth in net interest income (NII) and improved asset quality.

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Outlook

In Q2 FY24, most analysts and company officials expect an increase in the cost of funds too because the transmission of rates comes with a lag effect and higher cost maturity.

"Our long-term book, which we borrowed three years ago, was at a much lower price. So, factoring all of that, we expect a 5-10 bps increase in the cost of funds in Q2," said Rashmi Mohanty, Chief Financial Officer (CFO) of the company during the earnings call on July 28.

Further, considering the concerns of the cost of funds, Parag Sharma, Joint Managing Director (Jt MD) & CFO of Shriram Finance, said there could be some increase in the subsequent quarters.

Going forward, analysts expect up to a 50-80 bps increase in the cost of funds across companies. "Borrowing costs will keep going up till Q3 FY2024, increasing up to 60-80 bps levels over FY2023 levels," Saggar said.