Prefer fixed interest rates to floating rates.
With cost of funds seeing a sharp rise, non-banking financial companies (NBFCs) are adopting different strategies to protect margins. They are preferring fixed interest rates over floating rates. NBFCs are also lowering dependence on banks and tapping cheaper sources of funds like debentures, commercial papers, mutual funds (MFs), other institutions and bonds.
On Thursday, nearly 75 per cent of NBFCs’ incremental borrowings are at fixed rates. A year ago, it used to be half.
“There was a time, say till March 2010, when 50 per cent of our incremental borrowings were at floating rates, but now, it is only 25-20 per cent. This was done to mitigate the impact of fluctuating interest rates on margins,” said R Sridhar, managing director of Shriram Transport Finance.
“We are going for fixed interest rate loans for a tenure of three to five years, based on our asset liability management. Only 25-30 percent of our working capital needs are met through funds at floating interest rates. This proportion was skewed in favour of floating rates till May 2010,” said a senior official of a Chennai-based NBFC, who did not wish to be named.
Similarly, NBFCs are seeking to lower their dependence on bank funding, which still constitutes roughly 75 per cent of their borrowings. However, on an incremental basis, nearly half of their funding requirements are met through non-banking sources like retail bonds, securitisation and institutional investors like LIC and MFs.
The most important aspect is the return of MFs as a source of funds, according to an analyst with an international rating agency. “Though the level of exposure has not yet reached the pre-crisis levels of 2008, when more than 10 per cent of the working capital needs of NBFCs were met by MFs, it is steadily rising,” he said.
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“Bank funds are getting costlier, whereas money from other sources such as retail, MFs and FIIs is cheaper by 50-100 basis points. However, banks still remain our principal source of funds,” said an official of a Kolkata-based asset financing NBFC. “In some cases, banks are charging nearly 11 per cent, that too on a floating basis, which is at least 200 basis points higher than what retail lenders and MFs charge,” said an official of an infrastructure financing NBFC.
“With rising interest rates, NBFCs, particularly the ones with lower ratings, will find it hard to maintain margins. The average cost of funds has already reached around 10.5 per cent, compared to 8.5-9 per cent six months earlier. Post-crisis, a lot of them stayed away from MFs, but they are slowly staring to tap these sources again,” said an analyst at LKP securities.
However, NBFCs with good ratings, well-diversified asset-liability mix, high capital adequacy ratio and better parentage are likely to handle the situation well, as they are better placed to bargain and raise funds at cheaper rates, according to him.