NBFCs may see 60-100 bps rise in cost of funds, pressure on Q1 margins as bank turn funds tap dry

Though the shadow banks are expecting a rise in their CoFs alongside some NIM contraction, the asset quality is expected to be stable.

Non-banking financial companies (NBFC) are expected to see 60-100 basis points (bps) rise in their cost of funds (CoF) for the first quarter of the current financial year as banks shy away from funding them, industry experts said.

Sanjay Agarwal, senior director for BFSI at CareEdge, highlighted that the borrowing channels for NBFCs are getting expensive resulting in a rise in CoF. “We expect around 60-100 bps jump in the CoF of the NBFCs as the borrowing channel from banks is expected to remain tight,” he said.

Ratings agency ICRA in a report in March had highlighted that bank lending to NBFCs have moderated and may see some continuation due to the increased risk weights and exposure reaching sectoral limits.

In November 2023, the Reserve Bank of India (RBI) hiked risk weight by 25 percent where it (risk weight) was below 100 percent, signalling the concerns about high pace of bank lending to NBFCs.

The RBI’s sectoral credit data for May 2024 showed that the bank lending to NBFCs grew moderately at 16 percent from 27 percent a year back.

RBI Governor Shaktikanta Das on June 20 said timely action on unsecured loans has moderated the growth of such loans. "We thought it is better to act in advance and slow down the credit growth in these segments," he said at the second global conference on financial resilience organised by the College of Supervisors in Mumbai.

The remaining funding that NBFCs got from banks resulted in higher CoF for them as banks raised their marginal CoF-based lending rates (MCLRs). For example, HDFC Bank raised its MCLR-based rates by 10 bps in July 2024 and public sector lender Bank of Baroda (BoB) by 5 bps.

The shadow banks have since started borrowing at higher costs from other avenues such as capital markets, which is jacking up the costs.

The net interest margin (NIM) of the NBFCs, too, may come under pressure, according to experts. “Margins will continue to compress on account of the increase in the CoF, portfolio mix shifting towards home loans, and the company pursuing growth in higher ticket size loans,” Axis Securities said in a report.

Disbursements to fall

The shadow banks are likely to experience a decline in loan disbursements during the April-June quarter due to extended electoral activities and disruptions caused by severe heat waves.

Emkay Global Financial Services, a brokerage firm, noted in a report that the first quarter typically sees subdued activity, compounded by uncertainties surrounding the monsoon and a slowdown in commercial vehicle sales. As a result, growth in loan disbursements across the NBFC sector is expected to be limited.

Nomura also anticipates a slowdown in growth of loan disbursements during the first quarter of the current financial year, attributed to reduced demand for unsecured loans amid heightened regulatory scrutiny.

Provisional numbers released by some of the top NBFCs showed a strong year-on-year (YoY) growth. Disbursements of Mahindra and Mahindra Financial Services rose 5 percent YoY to Rs 12,730 crore in April-June and Bajaj Finance reported nearly 11 million fresh loans in the April-June period, rising 10 percent on-year.

“AUM and disbursement growth should pick up from the next quarter, but given the base effect, the growth is likely to be moderate versus previous year," the Emkay report highlighted.

Stable asset quality

Though the non-bank lenders are expecting a rise in their CoF alongside some contraction in the NIM, their asset quality is expected to remain stable.

“Asset quality is expected to remain broadly stable during the quarter,” Axis Securities said in a report. “Asset quality for most players would remain stable, led by superior customer selection and tightening of credit underwriting policy," seconded the Emkay report.