NBFC Lenders Face Increasing Borrowing Costs
Non-bank lenders are experiencing a surge in borrowing costs as banks have become more cautious in lending to them, following a regulatory warning. In response, these companies are diversifying their sources of funding to mitigate the impact.
Key Features:
- Non-bank lenders, such as Bajaj Finance and Shriram Finance, have raised their fixed deposit rates to attract funds and compensate for lower bank borrowings.
- The Reserve Bank of India (RBI) increased the risk weights on NBFCs, making bank borrowings more expensive by 30-50 basis points.
- Banks have tightened their exposure limits for NBFCs, further increasing the challenges faced by non-bank lenders.
- NBFCs are turning to more expensive forms of funding, including deposits and bonds.
Benefits:
- Higher fixed deposit rates provide an opportunity for individuals to earn higher returns on their investments.
- Diversifying funding sources helps NBFCs maintain their growth expectations and expand their asset base.
- Regulation aimed at curbing unsecured lending through fintech platforms ensures greater financial stability and reduces potential risks.
Impact on Non-Bank Lenders
The cautionary measures taken by banks with regards to NBFC lending, coupled with the increased cost of borrowing, are expected to slow down the growth of NBFCs. To maintain stable margins, these companies may have to pass on the increased rates to customers, resulting in a potential decrease in growth rates.
Customer Testimonial:
According to Umesh Revanar, Executive Vice Chairman of Shriram Finance, steady growth combined with stable margins is the ideal strategy for NBFCs. He suggests that growth rates may decrease, but it ultimately depends on the priorities of each NBFC.
Increased Reliance on Deposits
Shriram Finance and Bajaj Finance, rated AA+ and AAA respectively, have raised their fixed deposit rates to attract more deposits. This move was prompted by the need to compensate for reduced bank funding and secure alternative sources of funds.
- Shriram Finance has increased fixed deposit rates by 5-20 basis points across various maturity tenures, reaching up to 10.5%.
- Bajaj Finance has increased senior citizens’ fixed deposit rates by up to 60 basis points, with tenures ranging from 25 to 35 months, and by 40 basis points for tenures between 18 and 24 months.
Benefits:
- Offering higher fixed deposit rates provides an attractive opportunity for individuals to earn better returns on their investments.
- The availability of diverse funding sources enables NBFCs to maintain their asset-side growth expectations and provide stability to their operations.
Banks’ Exposure to NBFCs
Banks are one of the primary sources of borrowing for NBFCs. However, in recent months, there has been a decline in bank credit to the NBFC sector. As per recent RBI data, bank credit growth to NBFCs in February was 14.7%, down from 31.9% in the previous year and 15.6% in January.
Recent Development:
In November, the RBI increased the risk weights on bank lending to NBFCs by 25 basis points to counter the increasing exposure, particularly through unsecured lending facilitated by fintech platforms. This, coupled with internal sectoral limits, has led to decreased bank credit exposure to the NBFC sector.
Key Takeaways:
- Non-bank lenders are facing higher borrowing costs as banks exercise caution in lending to them.
- NBFCs are diversifying their funding sources, including deposits and bonds, to compensate for reduced bank borrowings.
- The RBI’s regulatory measures, such as increased risk weights, have impacted the cost of borrowing for NBFCs.
- NBFCs may experience a slowdown in growth as borrowing costs increase and banks become more cautious in lending to them.
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