NBFC lenders find borrowing a costly affair

NBFCs such as Bajaj Finance and Shriram Finance have hiked their fixed deposit rates sharply, hoping to shore up capital that can make up for lower bank borrowings.
NBFCs such as Bajaj Finance and Shriram Finance have hiked their fixed deposit rates sharply, hoping to shore up capital that can make up for lower bank borrowings.

Summary

Non-bank lenders that depend on banks for a significant portion of their borrowings are now turning to other more expensive options for funds, including deposits and bonds

MUMBAI : Non-bank lenders are struggling through a spike in borrowing costs as banks have become cautious in lending to them following a regulatory warning, forcing these companies to diversify their money sources.

Large deposit-taking non-banking finance companies such as Bajaj Finance and Shriram Finance Ltd, for instance, hiked their fixed deposit rates sharply this month, hoping to shore up funds that can make up for lower bank borrowings.

Non-bank lenders that depend on banks for a significant portion of their borrowings are now turning to other more expensive options for funds, including deposits and bonds. Deposits are expensive as NBFCs have to offer higher rates than banks.

The Reserve Bank of India in November increased the risk weights on NBFCs by 25 percentage points, making their cost of borrowing from banks costlier by 30-50 basis points, which is one-hundredth of a percentage point. Higher risk weights require banks to set aside more capital to provide cover against such loans.

The regulator had been cautioning about the increasing exposure of banks to NBFCs, as it found that loans to the non-banks were being routed towards unsecured lending through fintech platforms. RBI decided to come down on this by limiting bank funding to the NBFCs.

"Liquidity has generally been tight in the system for the past several months. Further, banks have tightened their NBFC segment exposure limits as well as single NBFC exposure limits significantly in the last few months following RBI action," said the head of an AAA-rated NBFC, declining to be identified.

“In addition, risk weights on lending to NBFCs, especially AAA, have been disproportionately hiked recently. NBFCs of the scale and size of Bajaj and Shriram, therefore, don't have too much of a choice but to turn to deposits to shore liabilities to maintain their asset-side growth expectations."

NBFCs say their growth could slow as the cost of borrowing increases and banks turn cautious on lending to them.

"We'd like to grow steadily and keep margins stable. If you decide to grow steadily, NBFCs will have to pass on the rates (to customers) and growth rates may slow down," said Umesh Revanar, executive vice chairman, Shriram Finance. “It depends on what NBFCs want to do. Instead of 20% you grow at 15%."

While Shriram Finance, which is rated AA+, has hiked fixed deposit rates by 5-20 basis points on various maturity tenures by up to 10.5%, Bajaj Finance, rated AAA, has increased its FD rates for senior citizens by up to 60 basis points in the 25-35 month tenure, and by 40 basis points in the 18-24 month tenure by up to 8.85%.

For Bajaj Finance and other AAA rated companies, bank funding is available at 8.40-8.50%. The difference between AAA and AA+ loans is 25-40 basis points.

"I understand that the Reserve Bank of India has asked banks to be watchful about lending to NBFCs after they increased the risk weights. While bank credit has increased, incremental credit growth to NBFCs has slowed down," said a senior official with a private sector bank.

Banks are among the largest lenders to NBFCs. For Bajaj Finance, banks loans accounted for 24% of its overall borrowing, while deposits accounted for 29% and money markets for 47%, as of December 2023. 

For Shriram Finance, banks contributed 26% to their overall funding, while public deposits stood at 22% and the rest was divided among money markets, securitisation and foreign currency bonds.

According to rating agency Icra, bank credit to the NBFC sector has declined in the previous 2-3 months. Recent RBI data show that bank credit growth to NBFCs fell to 14.7% in February, from 31.9% a year earlier and 15.6% in January. 

Total bank credit exposure to NBFCs stood at 15.14 trillion at the end of February.

"Incrementally, banks would be more constrained to raise the share of their exposures to the NBFC sector, given their internal sectoral limits and the recent increase in risk weights by the RBI for bank exposures to the NBFCs," Icra said in its latest report on NBFCs. 

“Further, bank credit is expected to grow by 11.7-12.6% in FY2025, lower than the robust 14.9-15.3% estimated for FY2024. Thus, assuming the banks continue to hold the share of credit to the sector (as % of their overall credit) at current levels around 9.4%, incremental direct lending from banks could be constrained at Rs. 1.7-1.9 trillion for FY2025," it added.

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