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  • CRISIL Ratings
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July 10, 2018 location Mumbai

Non-banks stare at 50-75 bps squeeze in spreads

Efficient liability management would be key to profitability

CRISIL expects gross spreads (asset yield minus borrowing cost) of non-banks[1] to compress 50-75 basis points (bps) this fiscal, and remain under pressure for some asset classes.


The impact on profitability will come from borrowing cost, which is expected to rise 40-50 basis points (bps) this fiscal compared with ~100 bps decline seen in fiscal 2018.


Non-banks with strong credit profiles are expected to manage the situation better because of efficient liability management.


Over the past few years, non-banks have benefited from benign interest rates stemming from surfeit liquidity, which turned into a deluge after demonetisation. Consequently, cost of borrowings for non-banks fell by almost 100 bps to 8.2% in fiscal 2018. That cushioned spreads after asset yields declined ~50 bps to ~12% as competition from private banks intensified.


The story will change further this fiscal, especially on the liabilities side. Systemic liquidity has been tightening with foreign portfolio investors pulling Rs 40,660 crore from the debt market in the first quarter of this fiscal compared with net investments of Rs 119,036 crore in fiscal 2018.


That, and the cautious stance of public sector banks put under Prompt Corrective Action by the Reserve Bank of India, have nudged up interest rates. For instance, interest rates on commercial paper (CP), a cheaper source of funding for non-banks last year, have risen a sharp 100 bps this fiscal, accompanied by volatility.


Many non-banks will have to look at other avenues for funding such as private banks, corporate-lending non-banks, capital market bonds, and retail public issues, which would be 50 bps or more costlier.


The first quarter of this fiscal has already seen non-banks raise more than Rs 15,000 crore through public issues of non-convertible debentures, or thrice what was raised in fiscal 2018.


Krishnan Sitaraman, Senior Director, CRISIL Ratings said, “While the growth potential remains high for non-banks, asset yields are unlikely to rise as much as borrowing costs. In the retail and smaller-ticket micro, small and medium enterprise (MSME) segments, which constitute over three-fourths of the AUM of non-banks, competition from private banks would intensify, especially in the urban areas. So, excepting asset classes such as used-vehicle loans and gold loans, where non-banks have a strong market position, spreads will be under pressure.”


As a result, their profitability could get squeezed by 50-75 bps. While most of them will have to manage this pressure, access to funding will not be equal for all. Well-managed non-banks with a strong track record, better credit profile, active liquidity management and strong parentage will get the lion’s share of funds.


But all of them will have to sharpen focus on the liability side, with asset-liability maturity management occupying centre stage.


[1] Non-banks include non-banking finance companies (NBFCs) and housing finance companies, but exclude government-owned non-banks


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