NBFCs see minimal relief in borrowing costs despite aggressive rate cuts

Muted transmission of repo rate reductions keeps borrowing costs high, with analysts expecting full benefits to flow in gradually over 18 months

Non-banking financial companies (NBFCs) have seen only marginal relief in borrowing costs despite aggressive monetary easing with a 100-basis-point cut in the repo rate between February and June,

 

Analysts attributed this to the muted transmission of rate cuts, particularly in borrowings linked to the marginal cost of funds-based lending rate (MCLR), which adjust slowly. They said the cost of funds for NBFCs declined by only 10-15 basis points (bps) during the June quarter (Q1FY26).

 

“The benefit each quarter may be limited to 10-15 bps. The full benefit of the rate cut is expected to be realised over 18 months, starting from Q3FY25. For the next four quarters, a 10-15 bps downward repricing is likely each quarter, depending on each entity’s borrowing mix,” said Anil Gupta, senior vice-president and co-group head, Financial Sector Ratings, Icra.

 

NBFC borrowing costs have remained elevated due to a slowdown in bank lending, especially to lower-rated NBFCs.

 

Shriram Finance, rated below AA+, saw its cost of liabilities decline by 7 bps in Q1 to 8.88 per cent from 8.95 per cent. Its incremental cost of funds fell sharply from 8.86 per cent in Q4 to 8.37 per cent, with expectations of further declines.

 

Bajaj Finance reported a Q1 cost of funds of 7.79 per cent, down 20 bps from Q4FY25. L&T Finance recorded a 16 bps decline in Q1FY26, with borrowing costs at 7.84 per cent in Q4 and 7.83 per cent in Q3FY25. 

 

For FY26, NBFC borrowing costs are projected at 7.60-7.65 per cent.

 

Industry experts highlighted that MCLR-linked loans registered cuts of only 5-10 bps, suggesting limited benefit for NBFCs in Q2FY26.

 

“Full transmission is yet to happen. For us, borrowing from banks (linked to MCLR) remains expensive,” said George Alexander Muthoot, managing director and chief executive officer, Muthoot Finance.

 

“This muted transmission reflects the lag in pass-through, especially via MCLR-linked bank borrowings. The limited benefit also highlights banks’ cautious stance on lending to non-PSU and lower-rated NBFCs,” said Venkatkrishnan Srinivasan, founder of Rockfort Fincap.

 

However, Srinivasan said, banks are actively lending to PSU NBFCs and top-tier private NBFCs (AAA/AA+ category), often offering competitive rates linked to external benchmarks (EBLR), indicating a clear preference in credit deployment.

 

Analysts said that by June 2026, the complete benefit of the easing cycle is likely to be reflected in NBFC borrowing costs. Over the coming quarters, the impact will be driven not only by external benchmark-linked loans but also by MCLR-linked loans and the refinancing of fixed-rate non-convertible debentures raised up to Q4FY25, they said.