` 18 trillion of NBFC debt will be repriced upwards

ACRISIL Ratings analysis of NBFCs it rates shows `15 trillion of debt, or 65% of outstanding debt as on March 31, 2022, is due for repricing this fiscal owing to interest reset or maturity. The interest rate scenario has turned for NBFCs with RBI hiking the repo rate by 90 bps in 2 tranches. Krishnan Sitaraman, Deputy Chief Ratings Officer at CRISIL Ratings, hints: “Another `3 trillion of incremental debt is likely to be raised to support expected growth in lending this fiscal. We see the overall cost of borrowings for NBFCs rising 85-105 bps.”

The impact of this will vary based on the mix of fixed and floating-rate borrowings in NBFC portfolios. Earlier, transmission of such rate changes made by the RBI used to happen with a lag. Sitaraman argues: “However, with floating rate bank loans, the pass-through is relatively quicker compared with loans linked to MCLR.”

LOANS: FLOATING, MCLR-LINKED

CRISIL Ratings projects repo rate to rise a cumulative 165 bps in current fiscal. Sitaraman indicates: “`18 trillion of debt will be repriced at higher cost this fiscal. Lag in MCLR increase will lower impact on borrowing cost as compared to increase in benchmark repo rate. Impact on HFCs is likely be higher due to higher external benchmark-linked / repricing debt in current fiscal. Gross spreads will compress 40-60 bps, cushioned partly by passthrough of interest hikes.”

44% of the floating loans, maturing in one year, are linked to MCLR Repo rate/Tbill yield linked loans. Debt capital markets seem to have priced-in rate hikes. CRISIL study shows increases or decreases in MCLR over the past 5 fiscals have not kept pace with the changes in the repo rate. Sitaraman underlines: “Interest rates on repo-linked bank facilities do reflect such changes very quickly. Floating rate loans linked to repo are likely to be repriced faster than MCLR linked loans, which will see lagged rise in cost. Borrowing cost will rise 85-105 bps for NBFCs this fiscal, but stay below long-term average. HFCs will witness higher impact but their cost of borrowings will still be lower than other NBFCs.”

GOING AHEAD

Going ahead, 3 factors will drive increase in borrowing costs. Ajit enlists: i) Quantum and timing of repricing of existing loans, along with incremental funds to be raised; ii) Proportion of debt on balance categorized into fixed rate and floating rate loans; and iii) Type of external benchmarks used for floating rate loans. 65% of outstanding non-bank debt will be repriced this fiscal. Proportion of debt getting repriced will be higher for HFCs as compared with other NBFCs.

Ability to pass on hikes will vary with business segments. Credit costs inched up as players created contingency provisioning. Some players have released part contingency buffers in FY22. Consequently, earnings not likely to be majorly impacted.