Cholamandalam Investment and Finance Company expects improvement in net interest margins (NIMs) over the next two quarters, as falling interest rates and reductions in the Marginal Cost of Fund-Based Lending Rate (MCLR) by banks lower the cost of funds, according to the President and CFO, Arul Selvan D.
For the portion of the portfolio tied to floating-rate loans, the company will pass on the benefit of lower rates to customers, as these rates adjust with market changes. However, since vehicle loans, a significant part of the portfolio, are largely fixed-rate, the overall impact on NIMs remains positive.
“55% of the loans which we have given are fixed-rate books. So we stand to benefit when rates come down. We will have a better cost of funds without having to pass on the benefit to vehicle finance customers. While we may have to pass on the benefit to floating rate books, like Loans Against Property (LAP) and home loans,” he said during a conversation with NDTV Profit.
Selvan compared this to the time when interest rates were rising. At that time, NIMs decreased because the company's existing loans, issued at lower rates when borrowing costs were low, earned less relative to the higher cost of funds.
He acknowledges that for new customers, it will have to offer loans at the current, lower market rates to stay competitive. However, it will take a long time for these new, lower-rate loans to make up a large enough part of their total loan book to negatively affect overall profitability.
“While incremental volumes we may have to give at slightly lower rates considering the market, there are competition and everybody is reducing rates. But that reduction to influence the total book will take time,” the top executive said.
While vehicle finance remains the company's “staple business”, Selvan outlined plans for gradual diversification into mortgage businesses, including LAP, home loans, Small and Medium Enterprise (SME) loans and Secured Business and Personal Loans (SBPL).
“So overall in the next three years, the proportion of vehicle finance book will marginally drop and the mortgage book will marginally increase.” The company is targeting 20-22% growth in assets under management (AUM) for FY26. “We expect a 20 to 22% growth this year on the AUM side,” he said.
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