MUMBAI: The Reserve Bank of India’s (RBI) 100-basis-point repo rate cut in 2025 has definitely benefited a lot of borrowers, especially ones linked to the external benchmark lending rate (EBLR). However, non-banking finance companies (NBFCs) are yet to get access to cheaper funds. The key reason: Most loans to NBFCs are linked to marginal cost of funds-based lending rate (MCLR).
“Till now, banks have not revised their lending rates to NBFCs. They are revising their rates only for direct borrowers,” Muthoot Finance MD George Alexander Muthoot said. He is hoping that things will improve in the next couple of quarters.
Deepak Aggarwal, co-founder and co-CEO, Moneyboxx Finance, said while some larger players have seen some relief, smaller NBFCs continue to pay higher interest costs, which limit their ability to extend credit at competitive rates. “For NBFCs to drive meaningful credit expansion and support inclusive growth, a faster and fuller transmission of rate cuts is important, especially for smaller players who often serve in segments where traditional banks don’t.”
Though the RBI recently reversed its decision to impose 25% higher risk weights to NBFCs to improve credit flow to the sector, banks remain cautious. The sectoral deployment data showed credit to NBFCs fell 0.3% year-on-year to Rs 15.63 lakh crore as on May 30.
According to the Financial Stability Report, released by the RBI on Monday, the dependence of NBFCs on bank funding decreased over the last year, as the impact of higher risk weight on bank lending to NBFCs played out. Data showed that the dependence of upper layer NBFCs on bank borrowings and public deposits was higher than the middle layer shadow lenders.
“Bank credit to NBFCs is generally linked to MCLR (3-month, 6-month), so the banks’ cost of funds will align with MCLR trends over the next few months. Despite recent increases, capital markets’ cost of funds remains favourable. We anticipate a 30-bps reduction in incremental costs for NBFCs over the next six months. Lower-rated issuers will also benefit from improved systemic liquidity, although the rate advantage will be limited for them,” AM Karthik, senior vice president and co-group head, financial sector ratings, ICRA, said.
The RBI said in the latest annual report that it had explored the idea of introducing the EBLRs for NBFCs. However, it was found not “feasible at this juncture”.
Srinivasan said the competitive pricing will drive transmission by NBFCs in their target asset segments. “Housing and new vehicle financing (commercial and passenger vehicles) will experience steeper lending rate reductions compared to other asset categories. Given NBFCs’ borrowers often have weaker credit profiles than banks, fixed-rate products are easier to manage.”
Source: The Financial Express
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