Tight regulations, rising cost of funds can pose challenges to NBFCs, say experts

A sharp increase in cost of funds and tightening of regulations by the Reserve Bank of India (RBI) may pose challenges to non-banking financial companies (NBFCs), said experts.

“We could see a rise in borrowing cost for NBFCs due to the competition with banks as players are offering higher and competitive rates,” said Vijay Gour, lead analyst, BFSI research, at CareEdge.

In a rising interest scenario, the cost of borrowings for NBFCs is expected to rise by 100-120 basis points (bps) in 2022-23, a CRISIL report said.

Echoing this, Jinay Gala, associate director, India Ratings and Research, said that there is an uptick in funding demand from NBFC players due to strong growth seen in fiscal 2023.

“One may expect funding costs to increase for lenders as liabilities get repriced higher in the coming months and we would see lenders passing on the rate hike pressure to certain floating segments like housing, unsecured etc,” Gala said.

The RBI in its Trend and Progress Report for 2021-22 highlighted that NBFCs have to be mindful of the rising borrowing costs they face in the wake of tightening monetary policy measures.

“With strong capital buffers, adequate provisions, and sufficient liquidity, NBFCs are poised for expansion. Nevertheless, going forward, NBFCs need to be wary of rising borrowing costs as financial conditions tighten,” the RBI said.

Highlighting this, Kishore Lodha, Chief Financial Officer, U GRO Capital, said: "NBFCs cost of fund would continue to depend on overall available liquidity, Benchmark rates, rating of the NBFC, parentage and vintage and quality of assets and governance."

On February 8, the monetary policy committee (MPC) raised the repo rate, or the rate at which the RBI lends short-term funds to banks, by 25 bps, taking the key policy rate to 6.5 percent. Since last May, the MPC has hiked the policy rates by 250 bps to fight persistently high inflation. One basis point is one-hundredth of a percentage point.

The rise in the repo rate has resulted in banks and NBFCs offering higher interest rates on fixed deposits among other financial products and services. Banks, both in the public and private sectors, are aggressively hiking interest rates to lure more deposits and meet the rising credit demand.

Tighter regulation

NBFCs have faced challenges also due to tightening regulations by the RBI which has taken away the advantage of regulatory arbitrage available earlier.

Moneycontrol had earlier reported that NBFCs may have a tough year in 2023 on account of tight regulations from the RBI. In the aftermath of the collapse of the erstwhile Dewan Housing Finance Ltd and Infrastructure Leasing & Financial Services (IL&FS), the central bank has been tightening rules for shadow banks, focusing on capital requirement and governance standards.

Also read: NBFCs brace for tougher year as tight RBI regulations, competition pose challenges

Industry experts highlighted that the sector is likely to see more tightening, which could impact their core lending business.

“For some years, we’ve seen the RBI as the dominating regulator but in the recent past, we’ve seen the involvement of the ministry of electronics and information technology where it has issued notices to some fintechs and NBFCs

In line with this, we can expect some strict guidelines coming in from the regulator in the next quarters, which could affect the business of NBFC players,” said Varun Sharma, chief executive officer, NBFC Advisory, a consulting firm.