NBFC lenders find borrowing a costly affair

livemint.com:

MUMBAI : Non-bank lenders are struggling through a spike in borrowing costs as banks have become cautious in lending to them following a regulatory warning, forcing these companies to diversify their money sources. Large deposit-taking non-banking finance companies such as Bajaj Finance and Shriram Finance Ltd, for instance, hiked their fixed deposit rates sharply this month, hoping to shore up funds that can make up for lower bank borrowings. Non-bank lenders that depend on banks for a significant portion of their borrowings are now turning to other more expensive options for funds, including deposits and bonds.

Deposits are expensive as NBFCs have to offer higher rates than banks. The Reserve Bank of India in November increased the risk weights on NBFCs by 25 percentage points, making their cost of borrowing from banks costlier by 30-50 basis points, which is one-hundredth of a percentage point. Higher risk weights require banks to set aside more capital to provide cover against such loans.

The regulator had been cautioning about the increasing exposure of banks to NBFCs, as it found that loans to the non-banks were being routed towards unsecured lending through fintech platforms. RBI decided to come down on this by limiting bank funding to the NBFCs. "Liquidity has generally been tight in the system for the past several months.

Further, banks have tightened their NBFC segment exposure limits as well as single NBFC exposure limits significantly in the last few months following RBI action," said the head of an AAA-rated NBFC, declining to be identified. “In addition, risk weights on lending to NBFCs, especially AAA, have been disproportionately hiked recently. NBFCs of the scale and size of Bajaj and Shriram, therefore,