The recent pause by the Reserve Bank of India (RBI) on rate hike is expected to reduce pressure on the net interest margins of the non-banking finance companies (NBFC) going ahead, says experts.
This is because, as per experts, the cost of funds is unlikely to increase till the next policy, so NBFCs will get some relief. Hence, pressure on NIMs is easing with a pause.
NBFC have been under pressure in the last few months and its strain was felt on the net interest margins due to rising borrowing cost after the RBI’s move to hike the repo rate to fight against inflation.
Net interest margins (NIM) is the difference between the interest income generated by NBFCs and the amount of interest paid out to their lenders.
The RBI hiked 250 basis points since May to fight against the high inflation, which was hovering over upper tolerance band of the central bank in most months of 2022.
“The RBI’s stance in April MPC meeting to pause the rate hike has come as a sigh of relief to the NBFCs to reduce pressure on NIMs, otherwise they would have been required to revisit their stance on rate hikes with competition and demand being key sensitivities,” said Rohan Juneja - Managing Director & CEO - TruCap Finance Limited.
“The pause may mean an extended pause which will ease off some pressure on the cost of funds,” said Ravi Subramanian, MD & CEO, Shriram Housing Finance.
Pressure on NIM
The 250 basis points (Bps) rate hike by the RBI put NBFCs under pressure because the borrowing cost of these entities increased sharply.
The borrowing also rose due to the competition from the banks as players were offering higher and competitive rates.
However, due to rising borrowing cost, NBFCs were unable to pass on the higher rates to the borrowers which in turn had put a pressure on their NIMs.
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As per market participants, the borrowing cost for NBFCs rose by 100-120 bps in 2022-23. One basis point is one hundredth of percentage point.
Sadaf Sayeed, Chief Executive Officer of Muthoot Microfin said lately NBFCs were facing pressure on NIM as cost of short term capital i.e., commercial papers has gone up substantially. Also for all the external commercial borrowing, hedging cost has gone up and yields have also gone up substantially.
Further Sayeed added that NBFC who used to rely on market-linked debentures (MLD), stopped it after the change in the income tax rules, which took away the benefit of tax arbitrage. Hence, the tax treatment on MLD has made it an expensive source.
Will stabilization of margins help NII growth?
Subramanian said that the extended pause will support credit growth in FY24 and in turn boost the topline and bottom line of NBFCs or housing finance companies.
He further said the credit offtake in the system has registered a strong resurgence in FY23, despite the hikes in interest rates. Furthermore, the improvements have been broad-based across segments, reflecting the resilience of the economy and ability of consumer to withstand higher rates.
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Earnings forecast
The earnings results of most non-banking finance companies is expected to be robust in the fourth quarter of the FY23.
“We have had tremendous credit growth in last financial year. The repayment rate has also improved significantly. In post covid portfolio there is hardly any delinquency,” said Sayeed.
On the housing finance companies front, Subramanian said we are optimistic on the growth outlook in the affordable Housing finance segment in FY24. FY23 has been particularly positive for HFCs on the back of secular trends around improving affordability, rising urbanisation and penetration in non-metros.
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