Cost of funds (CoF) of non-banking finance companies (NBFCs) should peak out by Q3 (October-December) FY24, after rising about 30-40 basis points (bps) from Q1 (April-June) FY24 levels, per an analysis of their rates and liability mix by Nomura Financial Advisory and Securities (India) Pvt Ltd (NFASL).

“This quantum of increase is higher than guidance given by most of the NBFCs. Further, the benefit of policy rate cuts, if any in H1 (April-September) FY25, on cost of funds for NBFCs should be visible only in H2 (October-March) FY25,” said NFASL research analysts’ Ajit Kumar, Param Subramanian and Ankit Bihani in a report. One basis is equal to one-hundredth of a percentage point.

As of FY23, bank funding to NBFC/HFCs (housing finance companies) constituted about 57 per cent/44 per cent of their total borrowings, according to the report.

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Further, bank loans to NBFCs/HFCs have almost tripled to about ₹13.7-lakh crore in July 2023 at a CAGR (compounded annual growth rate) of 21 per cent vs 12 per cent for overall bank credit, with PSU (public sector undertaking) banks having 65 per cent market share in it.

Bank funding to NBFCs/HFCs reached about 64 per cent of their net worth in Q1 FY24 (PSU banks: 102 per cent) vs 35 per cent in FY17, per the analysts’ assessment.

They expect NBFCs’ reliance on bank funding to come down in coming quarters, driven by a pickup in alternate sources of funding (for example, bond market/securitisation).

The analysts opined that repricing of NBFC liabilities is still underway, as it happens with a lag both in the upward and downward rate cycles.

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This increase in funding cost for NBFCs would be driven by three factors—another 10-15 bps increase in yields across buckets since 1Q24; a further increase in cost of NCDs (non-convertible debentures), as coupon rates for maturing NCDs in remaining FY24/25 (about 25-50 per cent of 1Q24 outstanding NCDs) are about 100-200bp lower than current yield; and MCLR (marginal cost of funds-based lending rate)-linked bank loans are still getting repriced upwards due to a lag.

This CoF increase of about 30-40 bps during Q1 FY24-Q3 FY24 is higher than the guidance given by most of the NBFCs and the average 20 bps increase built into NFASL’s current estimates.