RBI Regulations Spike NBFCs' Borrowing Costs

A month subsequent to the Reserve Bank of India's (RBI) announcement of stricter regulations governing credit to non-banking financial companies (NBFCs), the borrowing costs for these entities have surged significantly. Simultaneously, banks are also experiencing heightened expenses for funds amid tight liquidity conditions within the banking system.

Data from the Clearing Corporation of India (CCI) revealed that the cost of borrowing for companies, banks, and non-banks through commercial papers (CP) and certificates of deposits (CD) has risen by 15-25 basis points (bps) over the past month. Notably, the surge is particularly pronounced in the three-month segment of borrowing, a crowded space affected by the RBI's regulatory measures for NBFC credit announced on November 16.

In the primary market for commercial papers (CP), prominent NBFC player Bajaj Finance raised 91-day funds on December 14 at a rate of 7.90 per cent, marking a 28 bps increase from its previous 91-day CP issuance on November 10 at 7.62 per cent. Other entities, including Adani Enterprises and Axis Securities, also faced higher costs for fresh CP issuances.

Soumyajit Niyogi, Director at India Ratings & Research, highlighted that the rise in borrowing costs is not only attributable to market rates but is also influenced by liquidity-driven changes in the banking system. Commercial banks are reportedly leveraging the RBI measures to raise lending rates for NBFCs wherever possible.

Regulatory Measures Impact

The RBI's regulatory measures on November 16 included increase in bank capital requirements for consumer loans and mandated limits on various retail segment loans, reflecting the central bank's vigilance on unbridled growth in these types of advances. Additionally, the RBI raised risk weights on loans given by banks to NBFCs, leading to increased capital requirements across all classes of lenders and subsequently higher interest rates for borrowing segments.

The risk weight on consumer credit for banks and NBFCs was raised from 100 per cent to 125 per cent. Despite the hardening of rates, a senior treasury official from a foreign bank noted that, when compared with global rates and the cost of overseas borrowing, domestic markets remain relatively more affordable, potentially leading to a shift towards local markets.

NBFCs’ Borrowing Trends

NBFCs have experienced a more significant uptick in borrowing costs compared to other companies. The interest rates on CPs issued by NBFCs rose by 25 bps over the past month, whereas CPs issued by manufacturing companies saw a 15 bps increase, according to CCI data.

For bank funding through CDs, rates have increased by 20-25 basis points, primarily due to persistent tight liquidity conditions. Notably, the National Bank for Agricultural and Rural Development (Nabard), considered a benchmark, issued a CD maturing on February 6, 2024, at a rate of 7.29 per cent on November 9. Just a month later, another three-month CD was issued, maturing on March 28, at a rate of 7.55 per cent.

In the primary market for CDs, the Small Industries Development Bank of India (Sidbi), an all-India financial institution, raised one-year funds at 7.89 per cent on December 14. Currently, the central government is borrowing 364-day funds at a rate of 7.19 per cent.