Non-bank financial firms are likely to witness nearly Rs 18 lakh crore of their outstanding debt being repriced at higher levels in FY23 amid the rising interest rate scenario, Crisil Ratings said in a report on Tuesday.
The agency expects NBFCs (Non-Banking Financial Companies) borrowing costs to rise 85-105 basis points (bps) in this fiscal year as a result of recent increases in the repo rate of 90 basis points in two tranches and an expected increase of another 75 basis points. basis points in the remaining budget.
The agency said an analysis of the rated NBFCs shows: “Rs 15 lakh crore of debt, or about 65 percent of outstanding debt as at March 31, 2022, is to revalue this tax rate due to interest rate reset or maturity date. Another Rs 3 lakh crore of incremental debt is likely to be increased to support projected growth in lending Banks remain a major source of funding for NBFCs Banks’ share of NBFCs’ total borrowing rose to 34 percent in March 2022, from 27 percent in March 2018.
The agency said the impact of rate hikes will vary based on the mix of fixed and floating rate loans in NBFC portfolios.
Previously, the transmission of such rate changes by the RBI was delayed. With floating bank loans now being benchmarked against external measures such as the repo since October 2019, pass-through is relatively faster compared to loans pegged to the Marginal Cost of Funds-based Lending Rate (MCLR).
“Our study shows that increases or decreases in the MCLR over the past five budgets have not kept pace with changes in the repo rate. At the same time, interest rates on repo-linked bank facilities are reflecting such changes very quickly,” said Krishnan Sitaraman, the agency’s senior director and deputy chief ratings officer.
For home loans, which make up 35-40 percent of Assets Under Management (AUM), NBFCs should be able to pass the higher rates on to both existing and new customers, as interest rates here are primarily floating in nature, the report said.
But this rise will not be at the same rate as the rise in borrowing costs, amid increasing competition from banks, it said.
Other segments, such as vehicle financing and financing of micro, small and medium-sized enterprises (MSMEs), mainly comprise fixed-rate loans.
So only incremental loans would be charged at higher interest rates.
Gross spreads (loan interest minus borrowing costs) of NBFCs will push 40-60 bps this fiscal year. This tightness will be offset by the substantial provisioning buffers built up in the past two budgets, which have pushed up their cost of borrowing, the agency said.
Its director, Ajit Velonie, said many NBFCs had partially cleared their provisioning buffers last fiscal year, lowering their cost of credit.
“There is still a reasonable amount of buffer available — 0.5 percent to 2 percent of assets — as contingency provisions. That means the incremental provision would be lower. As a result, profitability this fiscal year is likely to be nearly stable compared to last year,” he said.
In addition to substantial provisions, the credit profiles of most NBFCs in the current fiscal year will be supported by adequate liquidity and improved capitalization, the rating agency said.
Speaking of NBFC’s restructured book, Sitaraman said that although payments and collections have started from this segment, the efficiency of collection is still lower than the normal loan book.
“We expect a higher level of slippage to NPAs from the restructured book compared to the normal book. This is something NBFCs will need to keep a close eye on,” he said.
The rate of slippage would be higher in the unsecured and MSME loans, while it would be lower in the housing and gold loan segment, he noted.
Sitaraman expects slippages on home and gold loans to be in the single-digit range — 5-10 percent — and higher in the unsecured and MSME segment, Sitaraman added.