Money & Banking

Agency takes into account changing bank rates and a 165-bps repo rate hike this fiscal

 Debt of non-banking financial companies (NBFCs), including housing finance companies but excluding government-owned NBFCs, aggregating ₹18-lakh crore, is set to become dearer by 85-105 basis points (bps) in FY23, according to Crisil Ratings.

This assessment takes into account the likelihood of total increase in repo rate by about 165 bps. However, overall profitability is expected to remain steady cushioned by a reduction in credit costs.

The ratings agency opined that credit costs, which have been rising for the past couple of years, should decline this fiscal because most NBFCs hold substantial provisioning buffers. That should offset some of the impact of higher interest rates on profitability.

Changing scenario

A Crisil analysis of NBFCs it rates shows ₹15-lakh crore of debt, or around 65 per cent of outstanding debt as on March 31, 2022, is due for repricing this fiscal owing to interest reset or maturity. Another around ₹3-lakh crore of incremental debt is likely to be raised to support expected growth in lending.

The interest rate scenario has turned for NBFCs, with the Reserve Bank of India (RBI) hiking the repo rate by 90 bps in two tranches. “We expect another 75 bps of hikes, taking the total expected increase this fiscal to about 165 bps,” Crisil said. The agency observed that the impact of repo rate hike will vary based on the mix of fixed and floating-rate borrowings in NBFC portfolios. Earlier, transmission of such rate changes made by the RBI used to happen with a lag.

However, with bank floating loans now benchmarked to external gauges such as the repo since October 2019, the pass-through is relatively quicker compared with loans linked to the marginal cost of funds-based lending rate (MCLR).

Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, Crisil Ratings, said: “Our study shows increases or decreases in MCLR over the past five fiscals have not kept pace with the changes in the repo rate. At the same time, interest rates on repo-linked bank facilities do reflect such changes very quickly. Extrapolating that, and after baking in the total about 165 bps hike likely in the repo rate this fiscal, we see the overall cost of borrowings for NBFCs rising 85-105 bps.”

In home loans, (constituting 35-40 per cent of assets under management/AUM), NBFCs should be able to pass on the higher rates to both existing and new clients since lending rates here are primarily floating in nature, the agency said. But this rise won’t be to the same extent as the increase in borrowing costs, amid intensifying competition from banks.

NBFC spreads to compress

“Other segments such as vehicle finance, and micro, small and medium enterprises (MSME) financing, comprise fixed rate loans majorly. So, only incremental loans would be charged at higher interest rates and here, too, they won’t be as much as the rise in borrowing costs. Consequently, gross spreads of NBFCs will compress 40-60 bps this fiscal,” per the Crisil study.

This squeeze will be offset by the substantial provisioning buffers built over the past two fiscals, which had cranked up their credit costs, it added.

Ajit Velonie, Director, Crisil Ratings, noted that last fiscal, many NBFCs had released their provisioning buffers partially, which had reduced their credit costs. “There is still a reasonable amount of cushion available — 0.5 per cent to 2 per cent of assets — as contingency provisioning. That means incremental provisioning would be lower. Consequently, profitability is likely to be nearly stable this fiscal compared with last,” he said.

In addition to substantial provisioning, what will support the credit profiles of most NBFCs this fiscal is adequate liquidity and improved capitalisation, opined the agency. “Add improving macro-economic landscape after the Covid-19 pandemic, and the stage seems set for higher disbursements and credit growth. That said, future waves of the pandemic, geopolitical issues, and a sharper-than-expected increase in interest rates will bear watching,” per the study.

Published on June 14, 2022