• Press Release
  • CRISIL Research
  • Research
September 17, 2018 location Mumbai

Margins of large HFCs, MFIs stable despite borrowing cost rise

But small HFCs, auto NBFCs would find it difficult to pass on hikes due to competition

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


The rates on commercial papers (CPs) and non-convertible debentures (NCDs) have already increased over 100basis 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 greater impact on theircost 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 dependon 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 netinterest margin (NIM) with increase in housing interest rates, relatively higher proportion of floating rateloans, and continued strong growth in the high-margin loan against property and developer loansegments.”


Large HFCs (AUMs > Rs 300 billion) account for ~80% of non-bank housing loan book and have alreadyincreased their interest rates by 30-60 bps since January this year, with a further 10-20 bps increase expectedover the next six months. Currently, more than two-thirds of the overall housing loans of HFCs are floating rateloans, with 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 extendshort-tenure loans will keep margins stable.


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


The proportion of market borrowings in non-banks’ resource profile, which had increased by 6-9% annually in thepast three years due to easy access to market and at rates cheaper than those offered by banks, has seen aslight 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 inMCLR and a material slowdown in corporate loan disbursement, especially by banks under Prompt CorrectiveAction plan.


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


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    Saman Khan
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    Prasad Koparkar
    Senior Director, CRISIL Limited


    Rahul Prithiani
    Director, CRISIL Limited