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Tough times ahead for NB finance companies

August 07, 2008 14:37 IST

A rise in interest rates has started pinching non-banking finance companies and housing finance companies, which say that the cost of funds is going up by 200-300 basis points.

Though banks had extended loans to NBFCs at fixed rates, there is a reset clause, which is now being exercised. In addition, the increase in interest rates is also impacting companies that were borrowing directly from the market. For instance, companies raising funds through the commercial paper route have to at least pay over 9 per cent interest compared with 7.35 per cent in January. For smaller companies, which do not enjoy a high credit rating, the cost of funds can be as high as 12 per cent.

What is also making life tough is the demand for longer-tenure loans by borrowers as they want to keep the equated monthly instalments under control despite a rise in interest rates. In contrast, the finance companies are unable to access long-term funds from banks, executives at NBFCs said. For instance, more and more car buyers are looking at tenures of five to seven years, instead of three to four years a year ago. A rise in the basic price of vehicles and higher interest rates have led to an increase in EMIs.

"While NBFCs require long-term funds, they face a challenge in raising long-term funds at an appropriate price," said Mahindra and Mahindra Financial Services Managing Director Ramesh Iyer.

"If the banks were to lend for longer tenure at a fixed rate of interest, the interest margins could be impacted in an increasing interest rate scenario. On the other hand, assets of most of the NBFCs are at a fixed rate. Funding such assets through variable rate liabilities could expose their interest margins in an increasing interest rate scenario," said Vibha Batra, co-head, financial sector ratings, Icra.

The restriction to access external commercial borrowings is adding to their woes, said the chief financial officer of an auto finance company. "Since I cannot raise funds in India, I want to raise funds overseas. Because the equity flow is drying up due to the situation today, more money has to be raised from the debt market. An NBFC should have a strong brand name and a high credit rating to survive in these times," he added.

In addition, finance companies also said restrictions placed by the Reserve Bank of India on accessing public deposits are hurting them.

So how are NBFCs trying to live in tough times? "There is a slowdown in vehicle financing and funding consumer durables. Players will have to do aggressive marketing, increase the ticket size and expand geographically to survive," said Deepak Poddar, the former managing director of Bajaj Auto Finance.

"The challenge for NBFCs is adequate liquidity availability. We will work on bringing down the transaction costs and better utilise resources. We will work on increasing the volumes of new and second-hand vehicles through the same branch network and use IT to bring down transaction costs," added M&M Finance's Iyer.
Falaknaaz Syed in Mumbai
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