“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% to 2% 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,” said Ajit Velonie, director with the rating company.
Crisil’s analysis shows that Rs 15 lakh crore of loans taken by NBFCs is due for repricing this fiscal owing to interest reset or maturity. Another Rs 3 lakh crore of incremental debt is likely to be raised to support expected growth in lending.
“We see the overall cost of borrowings for NBFCs rising 85-105 bps,” Crisil’s senior director Krishnan Sitaraman said, anticipating a total 165 bps repo rate rise.
Consequently, their gross spread — the difference between lending rate and borrowing cost — will compress 40-60 bps this fiscal.
The rating company is expecting the Reserve Bank of India to raise repo rate by another 75 basis points this fiscal, over and above the 90 bps rise in two tranches.
As bank floating loans are now linked to external benchmark like repo rate since October 2019, the pass-through is relatively quicker compared with loans linked to the marginal cost of funds-based lending rate (MCLR).
On the other hand, 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.
In home loans, which constitute 35-40% of assets under management, 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. But this rise won’t be to the same extent as the increase in borrowing costs, amid intensifying competition from banks.
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, Crisil said.