NBFCs may face NIM pressure as borrowing costs set to soar

By Shashank Didmishe

Non-banking financial companies (NBFCs) will face higher borrowing costs with the central bank hiking key policy rates after two years to combat inflation.

With interest rates increasing, the net interest margins (NIMs) of NBFCs could come under pressure, Krishnan Sitaraman, senior director & deputy chief ratings officer at Crisil, said. “However, in many of the segments, they will be able to pass on a reasonable amount of the interest rate increase to their customers. At the same time, in certain segments like new car loans, where there is direct competition from banks for them, they may find it difficult to pass on the increase in cost of borrowing, hence market share for them will likely decline in these segments,” he said.

The trend on NIMs has been mixed for NBFCs in Q4FY22. While the margins were up for affordable housing companies on a sequential basis in Q4FY22, major NBFCs experienced NIM compression, according to data compiled by Kotak Institutional Equities. NBFCs have been guided to absorb first part of the rise in funding costs as current NIMs are higher than their long-term averages, the brokerage said.

Despite the rise in borrowing costs, NBFCs are optimistic that loan growth will remain robust, led by revival of demand in both rural and urban areas.

There will continue to be some challenges, but a pickup in new vehicle sales is expected as investment activities and government capex spend in the economy increase while used vehicle demand continues to be robust, said Umesh Revankar, vice-chairman & MD of Shriram Transport Finance.

Similarly, Muthoot Finance MD George Alexander Muthoot expects government push on capex to bolster domestic economic activity. “We are optimistic that with the pickup in both urban and rural demands, there will be a pickup in demand for gold loans in the industry in the upcoming quarters,” he said.

Although some NBFCs will be able to pass on the higher costs to their customers, they will also employ other means such as rapid digitisation to improve operational efficiencies and tie-ups with banks in order to bring down costs, Sitaraman of Crisil said.

“They will also be attempting to reduce credit costs given the increased provisioning taken by them in the last two fiscals. These measures should help support their profitability levels,” he said.

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