Non-banking financial companies (NBFCs) could see a hike in their cost of funds as banks are expected to pass on rate changes to loans linked to the Marginal Cost Lending rates (MCLR), reported The Economic Times.
As of now, non-banks have been able to protect their margins as banks have not passed on the entire rate increase costs to MCLR borrowers.
Since the start of the hardening rate cycle in May, while repo rates have been hiked by 225 basis points, banks have increased MCLR rates only by 70-130 bps. One basis point is 0. 01%.
“While we have managed to limit the impact of rate hikes on borrowers and our margins so far due to slower transmission in the MCLR linked loans, we see costs rising by 50-75 bps starting from December 2022 to March 2023 as banks look to pass on these hikes due to tight system liquidity,” said the chief financial officer of a mid-sized non-bank.
Liquidity has generally been trending down with the central bank seeking to reduce excess liquidity from the system to manage inflation. The banking system liquidity surplus has narrowed to around 1. 5 lakh crore from 6. 3 lakh crore at the start of the fiscal year. Due to tightening liquidity conditions as banks are forced to hike deposit rates, they will pass on this hit through MCLR loans.
As per a Crisil report, the cost of funds for the sector is expected to rise by 100-120 bps, while gross spreads during the second half of this fiscalyear are likely to narrow down by 40-60 bps.
More than 55% of PSU banks’ floating rate loans are still linked to MCLR. Almost 41% of SBIs loans are still linked to MCLR.
“Rising rates will also lift the borrowing cost of NBFCs and lower their competitiveness versus banks, which have access to lower-cost funds,” Crisil Ratings said in a report.