While there is excitement among investors because of a rate pause, translating into a lower cost of funds for non-bank financial institutions, the "reality is not so sweet", according to CLSA Ltd.
The cost of funds will rise in FY24 despite a rate pause, the research house said in its June 13 note.
Cost Of NCDs To Not Fall In FY24
Most large NBFCs have 35–50% of their borrowing at fixed rates, primarily for non-convertible debentures, for an average tenure of three years. The non-convertible debentures issued after the pandemic in FY22, at very low interest rates, will come due for repayment in FY25, and these will be refinanced at higher rates by 100 basis points, the note said.
"For example, the weighted average coupon rate of NCDs maturing in FY24 for Bajaj Finance is 6.4%, whereas its incremental borrowing cost is 7.7–7.9%," CLSA said. "Also, given that G-Sec yields already factor in rate cuts, we do not expect a reduction in the incremental cost of NCD borrowings by NBFCs."
Cost Of Bank Borrowings To Decline In FY25
Bank borrowings by NBFCs are linked to both the marginal cost of funds-based lending rate as well as external benchmarks. While repo-linked borrowings would reprice immediately with a repo cut, MCLR borrowings reprice with a lag (1–12 months). Additionally, the quantum of MCLR cuts is lower than that of repo cuts, CLSA said.
The impact of repo cuts in the second half of FY24 will be witnessed more in the first half of FY25 on bank borrowing costs, it said.
Who Will Gain And Lose In A Rate Cut Cycle
Looking at the companies through the lens of cost of funds, the winner in the rate cut environment would be SBI Cards and Payment Services Ltd., CLSA said. "This is because 65% of its loans are at floating rates and with short repricing tenures. The asset book is at fixed rates," the note said.
The most negatively impacted NBFC in a rate cut cycle will be LIC Housing Finance Ltd., CLSA said. "This is because 60–65% of its borrowings are at fixed rates while 95% of its assets are at floating rates."
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