NBFCs going slow on lending rate cuts due to tepid credit growth

Of late, base rate or minimum rate at which banks lend have come down by 55 to 70 basis points

Non-banking finance companies (NBFCs), barring a few housing finance companies (HFCs), are going slow on cutting their lending rates, as, according to them, credit growth has been tepid. These companies have opted for protecting their margins.

At the start of the current financial year, most banks reduced their lending rates and after the sharp rate cut by the Reserve Bank of India (RBI) last month, there was one more round of lending rate cut by banks. As a result, the base rate or the minimum rate at which banks lend has come down by 55 to 70 basis points. Since the start of 2015, RBI has cut the repo rate or the rate at which banks borrow from the central bank by 125 basis points.

“The rates of NBFCs are not like bank rates. It depends upon the demand for credit. If the demand is good, then definitely we will cut rates. Business people do not only look at interest rates as the primary driver for taking loans. We lend to individuals and small businesses. In the second half of the financial year, I think there will be some credit pick up. That time we will definitely reduce interest rates,” said Umesh Revankar, managing directo of Shriram Transport Finance Company. Revankar added their average cost of funds since the beginning of this financial year had come down by 20 basis points.

Since the impact of the repo rate cuts were transmitted more in the capital market, many NBFCs had shifted their borrowing more by way of corporate bonds and commercial papers rather than bank borrowing.

Ananda Bhoumik, managing director and chief analytical officer at India Ratings and Research, said barring a few large finance companies most of the NBFCs continue depend on banks for most of their funding requirements. Banks have done small cuts to lending rates till date, offering little benefit of reduction in costs to finance firms. This put limit on how much they can reduce the lending rate.

Also, bulk of lending by finance companies is done at fixed rate. So change in rates for existing customers would only happen at the time of reset. In effect, process is gradual, he added. There is exception in one segment — loan against properties — where loan rates have declined by over 100 basis points to 12-13 per cent in the last three years. This is more in response to competition for private sector banks who have become aggressive in this segment.

“For most of the housing finance companies or the NBFCs, they try to do it (the lending rate cut) at the end of the month or quarter. Our board meeting will happen and after that we will do it. Soon we will be announcing it because our cost of funds has been coming down,” said Sam Ghosh, executive director at Reliance Capital.