NBFCs overcome high cost of funds by raising rates and reducing dependence on bank loans

After facing a persistent increase in financing costs non-bank lenders They are looking for new avenues to raise capital. Experts say more and more non-banks are diversifying away from bank lending and increasing the share of higher-yielding segments in their portfolio.

“To address rising costs of funds, many players have diversified their lending sources and reduced their reliance on banks, while slightly raising lending rates and improving their asset mix by increasing the share of high-yield assets, such as Loans for MSMEsused vehicle financing or secured micro loans,” said Avinash Singh, an analyst at Emkay Global“We hope that NIMs will improve for the majority NBFC (non-financial financial institutions) within our coverage, driven by a better mix of assets and moderating fund costs.”

In the June quarter of 2024, margins of most non-bank lenders remained under pressure due to rising lending and lower fee income. NBFCs had a mixed June quarter, with some moderation in AUM growth due to weak disbursements and some marginal weakness in asset quality and credit costs due to seasonality, elections and heatwave in northern states.

Net interest margins, including fees, remained under pressure due to low fee income, securitization and a higher cost of funds driven by loan pricing.

“The extreme heatwave and disruption in business activities (caused by a prolonged election process) led to some deterioration in collection efficiency, thereby raising the cost of credit for some of the lenders,” Singh said.

“Looking ahead, growth should gradually pick up as the festive season approaches, following above-average monsoons, and the margin trajectory should improve for most lenders as loan repricing is almost done. Rising asset yields should help margins and finally, the rate cutting cycle should accelerate margin expansion.” Experts also say that with a few exceptions of unsecured personal loans and MFIs, the trend in asset quality and cost of credit should remain largely stable. Credit costs saw a slight increase for most players due to seasonality, elections and some stress in the micro portfolio, while overall asset quality remained largely stable. While credit costs are expected to remain stable over FY25 due to improving loan profitability, the trend in asset quality and cost of credit should remain largely stable.
collection effort, better customer selection and improved product mix.

“We expect the overall growth trajectory to remain intact and the first quarter deficit to recover in the remaining quarters of FY25, supported by expansion in distribution reach, product-level disbursement focus, improved monsoons, higher government spending and improved efficiency,” Singh said.