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NBFCs spreads may get squeezed by 50-75 bps in FY19: Report

Wednesday, July 11, 2018

Non-banking financial companies (NBFCs) and housing finance companies' spreads are likely to compress by 50-75 basis points in this fiscal, says a report.

The borrowing costs for non-banks is also expected to rise by 40-50 basis points in this fiscal, affecting their profitability, compared to a decline of nearly 100 basis points seen in the previous fiscal.

"We expect gross spreads (asset yield minus borrowing cost) of non-banks to compress 50-75 basis points this fiscal, and remain under pressure for some asset classes," Crisil said in a report today. The government-owned non-banks are not included in the study.

The rating agency's senior director, Krishnan Sitaraman, said in the retail and smaller-ticket micro, small and medium enterprise (MSME) segments, which constitute over three-fourths of the AUM of non-banks, competition from private banks would intensify, especially in the urban areas.

"Excepting asset classes such as used-vehicle loans and gold loans, where non-banks have a strong market position, spreads will be under pressure," he said.

The report further said over the past few years, non-banks have benefited from benign interest rates stemming from excessive liquidity, which turned into a deluge after demonetisation. Due to this, cost of borrowings for non-banks fell by almost 100 basis points to 8.2 per cent in FY18. "It cushioned spreads after asset yields declined 50 bps to 12 per cent as competition from private banks intensified," the report said adding that the story in this fiscal will change further, especially on the liabilities side. "Systemic liquidity has been tightening with foreign portfolio investors pulling Rs 40,660 crore from the debt market in the first quarter of this fiscal compared with net investments of Rs 119,036 crore in FY18," the report said.

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