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| Base rate may raise cost of funds for NBFCs |
| BS Reporter / Mumbai Jul 06, 2010, 01:07 IST |
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Plan to look for alternative sources for funds before raising rates.
With most public sector banks setting their base rate at 8 per cent, non-banking finance companies (NBFCs) say their borrowing costs are likely to rise by up to 100 basis points (bps).
However, NBFCs, which compete with banks in certain sectors but rely on term loans from banks for a bulk of their funding needs, say they will look at alternative sources of funds before taking a call on raising lending rates.
From July 1, the benchmark prime lending rate system ceased to exist and banks moved to base rates. The latter is now the floor rate, except for specified categories.
The country’s largest lender, State Bank of India, has set its base rate at 7.5 per cent, as has the second-largest lender, ICICI Bank. HDFC Bank, the country’s second-largest private sector lender, has set its base rate at 7. 25 per cent. However, all other large public sector banks, such as Bank of India, Bank of Baroda, Union Bank of India and Punjab National Bank, have set their base rate at 8 per cent.
 “Most public sector banks have set their rate at 8 per cent. At present, we are on term loans of around 7 per cent with an annual reset. When these loans come up for reset, the borrowing cost is likely to go up,” said R R Nair, director and chief executive of LIC Housing Finance Ltd.
According to Nair, the mortgage financier’s average borrowing cost is around eight per cent.
According to data from the Reserve Bank of India, bank loans to NBFCs grew 37 per cent in 12 months to February 26, amounting to a total outstanding of Rs 1,13,834 crore.
Some companies, like the country’s largest mortgage financier, Housing Development Finance Corporation, had already tied up their immediate funding needs, Keki Mistry, vice-chairman and CEO of HDFC had earlier told Business Standard.
HDFC’s total outstanding loans from banks and National Housing Bank were Rs 30,360 crore as on March 31.
“We still have not heard from our bankers on the issue and expect to do so within the next few days,” said Shriram Transport Finance Managing Director R Sridhar.
If term loan rates become untenable, NBFCs may have to reduce their dependence on banks for funds. “We might have to look at other funding options, such as CPs (commercial papers),” said LIC Housing Finance’s Nair. Since most term loans from banks are reset annually, NBFCs could move to shorter-term instruments without a significant change in their maturity profile, he added.
According to Nair, rates in the money market are still slightly above 7 per cent and his company is likely to tap that route. “We will look at alternative sources of funds before we pass on the increase in borrowing costs to customers,” he added.
“Short-term rates will go up and NBFCs may increase their reliance on CPs. This might cause CP rates to harden,” said a senior executive of a Mumbai-based vehicle financier.
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