Sharp fall in incremental costs could boost margins of NBFCs

As economic recovery picks pace, shares of many financial institutions including non-banking financial companies (NBFCs) are in the limelight as economic recovery picks pace.

Abundant liquidity in the system attached with the central bank’s continued accommodative stance has aided investors sentiment towards this sector as incremental cost of funds across sources is likely to remain benign.

A recent study by Motilal Oswal Financial Securities Ltd showed that over the last nine months there has been a sharp decline in the incremental cost of market borrowings for NBFCs especially those with strong parentage. On an average, the share of market borrowings has fallen by 1,500 basis points (bps) in the past two years, it said in a report dated 28 December.

Citing examples, the brokerage house said in its report that BAF raised two-year funds at 4.7 per cent in December compared to over 7 per cent for three-year borrowings in February.

"For HDFC, cost of long-term funds (five years) fell nearly 200bp to sub-6% over the same period. Within vehicle financiers, Mahindra & Mahindra Financial Services has been the biggest beneficiary, with the cost of three-year borrowings declining by around 250bps to 5.25% in the past nine months," added the report.

In addition to market borrowings, deposits for both public and corporate have also witnessed a sharp decline in cost. In short, both these factors would aid margin expansion for NBFCs going ahead. According to the brokerage firm, NBFCs with niche presence and strong pricing power would witness margin expansion.

Moreover, margins are also expected to benefit from a reduction in overall leverage ratios across players. Different NBFCs would have varying degrees of margin impact over the next two-three years, said the report.