NBFCs may face margin pressure after rate hike as funding costs rise faster than loan yields

Non-bank lenders such as LIC Housing Finance, Bajaj Housing Finance and Aditya Birla Capital could be better placed in the RBI’s rate hike cycle, given their relatively higher floating-rate loan exposure, while Mahindra & Mahindra Financial Services and SBI Cards could face greater margin pressure as their funding costs reprice faster than their loan yields.

Funding costs: NBFC borrowing costs could rise faster than loan yields as many products reprice slowly Margin pressure: Smaller lenders with concentrated funding sources and limited pricing power could be more vulnerable Differentiation: NBFCs with higher floating assets than floating liabilities could benefit from the rate hike

Non-bank financial companies (NBFCs) may face pressure on their net interest margins as funding costs rise faster than loan yields following the Reserve Bank of India’s (RBI) 25-basis-point repo rate hike , with the impact likely to vary depending on lenders’ funding mix and ability to reprice loans. The RBI’s Monetary Policy Committee on Wednesday raised the repo rate by 25 basis points to 5.5 per cent and shifted its stance from neutral to calibrated tightening. While the immediate impact of the rate hike is expected to be manageable, the change in stance could have a larger bearing on lenders if funding costs remain elevated for an extended period. Advt

For NBFCs, the key issue is the mismatch between the repricing of liabilities and assets. NBFCs rely on bank loans, market borrowings, commercial paper and other wholesale funding, while several of their lending products, including vehicle finance, microfinance, gold loans and small-ticket consumer credit, are either fixed-rate or reprice relatively slowly.

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