NBFCs well-placed in rate-hike cycle: IIFL Capital Services

16 Jun 2022 , 12:57 PM

After two rounds of a cumulative rate hike of 90 bps last month by the RBI, CRISIL expects total cumulative rise of 165 bps (another 75 bps) till end-FY23, taking the repo rates to 5.65%.

Consequently, Rs18 trillion of NBFCs’ debt (existing Rs15 trillion and incremental Rs3 trillion) would be re-priced in ensuing quarters. Entities with higher share of MCLR-linked floating rates borrowings are better off compared with EBLR-linked borrowings, as the repricing is likely to happen with a lag. CRISIL expects an 85-105 bps rise in blended borrowing cost and a 40-60 bps compression in gross spreads for NBFCs.
Reduction in credit cost, helped by strong asset quality trends and utilization of contingency buffer, is likely to compensate for spreads compression; hence, overall profitability is likely to be stable-to-better in FY23.

Gross spreads to decline 40-60 bps

Over the last two years, NBFCs have been the key beneficiaries of excess liquidity and could manage to effectively compete with banks. In the rising interest-rate and tightening liquidity cycle, spreads of NBFCs may get compressed as banks’ interest rates are likely to rise with a lag. Further, NBFCs are likely to be impacted on the fixed-rate asset front (ex-housing finance). Overall, CRISIL expects the blended cost of funds for NBFCs to increase by 85-105 bps to 7.2-7.4% (from 6.4% in FY22); NBFCs may partially pass on the cost. Gross spreads would be impacted by 40-60 bps in FY23.

Higher share of HFC liabilities to come up for re-pricing

Total debt of NBFCs (including HFCs) is Rs23 trillion, of which Rs15 trillion would be repriced within the coming year. For the liabilities of NBFCs, re-pricing within one year is ~57/15/28% in 3/3-6/6-12 months. Of the overall liabilities of HFCs, 31% is likely to come up for repricing after one year. For HFCs, liabilities coming up for repricing within a year is ~65/13/22% in 3/3-6/6-12 months.

Share of bank borrowings likely to increase

In the last few years, NBFCs have diversified on the liability front, with rise in share of deposits (10% in FY16 to 14% in FY22) and foreign-sourced borrowing. Historically, borrowings from banks have had a large share in NBFCs’ borrowings (27% in FY18 to 34% in FY22); this is likely to go up further, in light of the volatile bond markets. Securitization borrowings were subdued in the last two years, as volumes were impacted due to COVID. However, with normalization of economic activities, share of securitization borrowings in total borrowings is likely to rise in FY23 (10% in FY20 to 9% in FY22). NBFCs are also exploring the co-lending model as an alternate avenue for funding.

Well placed on capital and asset quality

In the last four years, NBFCs have collectively raised ~Rs75 billion and leverage levels have come down to 5.2/3.8x for NBFCs/HFCs in FY22 vs 6.7/5.1x in FY19. They are well-positioned for the up-cycle ahead. With the R1 & R2 moratorium period coming to end, higher efforts on collections will be required. Any potential stress related to restructured loans is well provided for. CRISIL expects the credit cost to normalize in FY23 which would aid achieving stable profitability.

Other highlights

a) NBFCs’ loans are likely to grow 10-11% YoY to ~Rs30 trillion in FY23

b) Of the total floating rate borrowings of NBFCs, 35-40% is repo linked, 50-55% is MCLR linked and 10-15% is linked to TBills/Others

c) Ability to pass on rate hike will be better in low duration products like gold & unsecured loans and the least in home & MSME loans.

d) Opex is likely to go up with growth picking up

e) Co-lending is likely to gather pace in FY23