Margins Of Large HFCs, MFIs Stable Despite Borrowing Cost Rise

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Housing finance companies (HFCs) and non-banking finance companies (NBFCs), which have cruised on lower borrowing costs and easy access to finance in the recent years, are set for some hiccups as the interest rate cycle reverses course.

The rates on commercial papers (CPs) and non-convertible debentures (NCDs) have already increased over 100 basis points (bps) in the past year or so, even as the one-year marginal cost of funds-based lending rate (MCLR) has risen 30 bps. And the interest rate trajectory is expected to remain elevated for a while.

Given this, CRISIL Research expects the cost of borrowing to rise over 30 bps in fiscal 2019 and by a further 40-50 bps in fiscal 2020.

Players with higher exposure to market borrowings and short-term instruments will see a greater impact on their cost of borrowings in the near term.

Logically, this will push up the lending rates, too, though the pace and intensity of the increase in rates will depend on product competitiveness, existing interest rates, and a company’s dominance in the industry. However, large HFCs are expected to be more or less unscathed.

Says Prasad Koparkar, Senior Director, CRISIL Research, “Large HFCs will likely maintain their net interest margin (NIM) with increase in housing interest rates, relatively higher proportion of floating rate loans, and continued strong growth in the high-margin loan against property and developer loan segments.”

Large HFCs (AUMs > Rs 300 billion) account for ~80% of non-bank housing loan book and have already increased their interest rates by 30-60 bps since January this year, with a further 10-20 bps increase expected over the next six months. Currently, more than two-thirds of the overall housing loans of HFCs are floating rate loans, with the rate reset being applicable with immediate effect or within six months of an increase at the most.

Microfinance institutions, too, would be largely comfortable as their ability to pass on interest rate hikes and extend short-tenure loans will keep margins stable.

Says Rahul Prithiani, Director, CRISIL Research, “Small HFCs, however, will find it difficult to fully pass on the increase in borrowing costs and the premium charged on niche customer segments will only partially offset the blow given intense competition. Auto NBFCs, too, will find it difficult to fully pass on the higher cost of borrowing to consumers due to intense competition from banks, especially in new auto loans. Indeed, the fixed-rate nature of auto loans and an inability to pass on higher rates, especially in segments like new passenger vehicles/ commercial vehicles, due to intense competition will lead to sharp margin compression.”

The proportion of market borrowings in non-banks’ resource profile, which had increased by 6-9% annually in the past three years due to easy access to market and at rates cheaper than those offered by banks, has seen a slight tilt back towards bank borrowing in recent months as market rates have hardened over the past year.

The proportion of bank borrowing is, however, expected to remain stable with a gradual increase expected in MCLR and a material slowdown in corporate loan disbursement, especially by banks under Prompt Corrective Action plan.

Note: The analysis does not include the impact of IND AS

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