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Cost of funds for L&T Finance Holdings could increase by 12-14 bps due to the Reserve Bank of India’s recent move to increase risk weights on unsecured consumer loans, said MD and CEO Dinanath Dubhashi.
While cost of funds may go up by 10-12 basis points over the next one year, the impact on net interest margins (NIM) will be lower as the increase will be selectively passed on to our unsecured consumer lending borrowers, he said, adding that the NBFC will look to gradually diversify its market borrowing and reduce the reliance on bank borrowings.
Currently, bank borrowing accounts for about 32-33 per cent of the lender’s funding profile. NIM for the company stood at 12.1 per cent in Q2 FY24.
“We will bring it down gradually. We also have relationships with banks that we have to take care of. We are not fair weather friends that today we move out of banks and tomorrow again we come back to them. These are long-term relationships,” he said.
Risk mitigation
“Every NBFC’s total bank borrowing cost will go up. So they will either have to absorb it or pass it on totally or partially. That will be the strategy for every NBFC,” he said, adding that L&T Finance will look at raising other avenues such as raising funds via non-convertible debentures (NCDs), commercial papers (CPs), and external commercial borrowings (ECBs).
As such, the company has a comfortable capital adequacy ratio of over 23 per cent, and will not need to raise equity capital for another 4-5 years, he said.
Unsecured consumer loans currently account for about 8 per cent of the NBFC’s total loan portfolio at around ₹6,500 crore, Dubhashi said, adding that it has no exposure to loans of less than ₹50,000.
Credit bureaus and some lenders have flagged increasing trends of delinquencies in small-ticket unsecured loans, especially those below ₹50,000. Gross NPA levels for unsecured loans below ₹50,000 are estimated to be around 8.5 per cent, whereas for those above that have been pegged at about 2.6 per cent.
Citing reports, Dubhashi said overall unsecured loans are estimated to be around ₹11 lakh crore, of which loans below ₹50,000 are only worth about ₹24,000 crore.
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