While most NBFCs have kept rates unchanged in an intensely competitive market, working with lower profit margins, some have passed on higher funding costs to customers through increased lending rates or fees, experts said.
The spread between borrowing costs for NBFCs and similarly rated corporates has widened to a four-year high, according to ratings agency India Ratings. For example, as of 2025 end, an AA-rated NBFC has to pay 75 basis points higher interest for a five-year loan than an AA-rated corporate-the highest since March 2022.
“Each investor will have a cap on how much can be invested in the NBFC sector,” said Anil Gupta, senior vice president and co-group head at Icra Ratings. “At a time when liquidity is tight and credit growth is high, NBFCs are lining up to borrow. In such times, investors become selective in their lending to NBFCs and this also increases the bargaining power, increasing cost of funds for NBFCs,” he explained.
Yields of the 10-year benchmark bond closed at 6.65% on Friday, and have declined about 12 basis points since last year.
AgenciesPrice of money As bond yields continue to rise despite the recent repo rate cuts, some NBFCs are increasing their lending rates
“Some NBFCs have increased their lending rates, and in other cases, they have not reduced the lending rate at all,” said Soumyajit Niyogi, director at India Ratings & Research. “In most cases, NBFCs have started transferring this high cost of funds to the end borrower. And partly they have started absorbing this in their margins.”
He noted that NBFCs cater to a relatively weaker, sub-prime segment where the lending rates start from 12-13%. “Here, if you increase the rate by 1-1.5%, the borrower may not feel the impact, but it is a dent in their pocket,” Niyogi said. The RBI has lowered the repo rate by a cumulative 125 basis points since February last year. “While there was a rate cut which happened in December, that hasn’t really translated much into lower cost of borrowing in most instances,” Jaykumar Shah, CFO at HDB Financial Services, said in an analyst call post third quarter results.
Monetary policy impulses are transmitted to NBFCs’ borrowing and lending rates, albeit incompletely. On the borrowing side, a key impediment to transmission could be the higher cost of funds faced by NBFCs, according to a research paper published in the October RBI Bulletin.
