Tough quarter ahead? NBFCs may see pressure on interest margins in Jan-Mar numbers, say experts

Analysts are also watching commentary from managements on the credit growth trends in the fourth quarter.

The results of non-banking financial companies (NBFCs) for the January-March quarter could reveal rising cost of funds putting pressure on net interest margins (NIMs), experts said. Analysts are also watching commentary from managements on the credit growth trends in the fourth quarter.

“The cost of borrowing for NBFCs has already increased 25-50 bps (basis points) over the last quarter of fiscal 2024. The increased cost of funds should result in some compression in net interest margins (NIMs),” ratings agency CRISIL said in a report.

The report added that the November 2023 regulatory action by the Reserve Bank of India (RBI) to enhance risk weights by 25 percentage points on such exposures as well as on lending to higher-rated NBFCs could weigh on credit growth, especially unsecured consumer credit.

Additionally, experts said that in the past few months, the central bank has taken strict regulatory actions against some NBFCs. Over the past few months, the RBI has imposed restrictions on various companies, including IIFL Finance, JM Financial, Bajaj Finance and M&M Finance.

Here, Abhishek Bansal, founding partner, Acumen Juris, said that the focus on governance and compliance among NBFCs would be key for their growth.

Also read: Small NBFCs may turn to SME, mortgage, green finance loans in co-lending business as risk aversion sets in

“The RBI has been cautiously focusing on the governance and regulatory norms of some NBFCs. Compliance would be key for them to avoid the regulatory hammer,” Bansal said.

The CRISIL report also highlighted that regulations for NBFCs have been evolving and need to be monitored. “At the same time, business models of NBFCs would continue to develop. As large NBFCs turn towards non-traditional segments, symbiotic partnerships may increase with emerging NBFCs focused on specific segments such as unsecured lending,” the report said.

Interest rates go up

Meanwhile, interest rates are going up. Some NBFCs in the recent past have increased their lending and deposit rates. For instance, Bajaj Finance on April 9 hiked its interest rates by 60 bps on most tenures. Similarly, Shriram Finance raised its interest rates on fixed deposits by 0.05 to 0.20 bps. One basis point is one-hundredth of a percentage point.

In November 2023, RBI Governor Shaktikanta Das flagged concerns over the surge in bank borrowings by NBFCs, saying increasing interconnectedness between financial institutions poses a contagion risk.

"NBFCs are large net borrowers of funds from the financial system, with their exposure from the banks being the highest. Banks are also one of the key subscribers to the debentures and commercial papers issued by NBFCs,” Das said.

Also read: Concerns over asset quality, risk management may have prompted RBI's crackdown on NBFCs: Experts

The latest sectoral growth data showed a slowdown in bank credit to NBFCs. On a year-on-year basis, bank credit to NBFCs grew by 14.7 percent in February 2024 compared to 31.9 percent growth in February 2023.

Ratings agency ICRA in a report in March said direct lending to NBFCs by banks is expected to be in the range of Rs 1.7-1.9 trillion (lakh crore) in the next financial year (FY25). “Bank credit to the NBFC sector has moderated in the past few months. Going forward, banks would be more constrained to raise the share of their exposures to the sector. This would be in the backdrop of their internal sectoral limits and the recent increase in risk weights by the Reserve Bank of India for bank exposures to the NBFCs,” ICRA said.