Will be forced to pass on higher rates if banks’ base rate is set close to 8.5%.
Non-banking finance companies (NBFCs) are bracing themselves for a possible increase in cost of funds as banks move to a new system of lending with reference to base rates. NBFCs, which compete with banks in certain sectors but also rely on term loans from banks for a bulk of their funding needs, say any increase in their cost of funds may have to be passed on to customers.
From July 1, the benchmark prime lending rate system will cease to exist and banks will shift to a base rate regime. The latter will be the floor rate, except for specified categories. Although banks have not decided their respective base rates so far, a few large state-owned lenders have indicated their base rates will be in the 7.5-8.5 per cent range.
“If the base rate is close to 7.5 per cent, there will not be an immediate impact on our cost of funds,” said R R Nair, chief executive of LIC Housing Finance Ltd. “However, if it is close to 8.5 per cent, it will definitely have an impact on our cost of funds.”
According to Nair, the mortgage financier currently avails of bank term loans at seven per cent, while its average borrowing cost is around eight per cent.
“A base rate of 7.5 per cent would be manageable, since it would still be within our average borrowing cost,” he added.
NBFCs may raise rates
A rise in cost of funds to unmanageable levels could lead to an increase in rates that NBFCs charge their customers.
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“If the rise is small, like 25 basis points, we will refrain from passing it on to our customers. However, we are intermediaries and if the increase is large, like 100 basis points, we will have to pass it on,” said V Ravi, chief financial officer of Mahindra Finance.
According to data from the Reserve Bank of India, bank loans to NBFCs grew 37 per cent in the 12 months to February 26, amounting to a total outstanding of Rs 1,13,834 crore.
Some companies, like the country’s largest mortgage financier Housing Development Finance Corporation, have already tied up their immediate funding needs.
“We are waiting for further clarity — whether the same base rate will apply to short-term and long-term rates,” said Keki Mistry, vice-chairman and CEO of HDFC.
“In any case, we have already borrowed for the lending we are doing today. So, we are not in immediate need of funds.” HDFC’s total outstanding loans from banks and National Housing Bank were Rs 30,360 crore as on March 31.
If term loan rates become untenable, NBFCs might have to reduce their dependence on banks to source funds. “We might have to look at other funding options, such as CPs (commercial papers),” said LIC Housing Finance’s Nair. Since most term loans from banks are reset annually, NBFCs could move to shorter-term instruments without a significant change in their maturity profile, he added.
Mahindra Finance’s Ravi predicted that short-term rates would go up and NBFCs might increase their reliance on CPs. “This might cause CP rates to harden as well,” he said.