Interest rate hikes by central banks across the world have put banks under pressure, and the collapse of Silicon Valley Bank (SVB) and Credit Suisse signal the dangers ahead.
SVB bought billions of dollars worth of treasury bonds using customers’ deposits when the interest rate was low. However, as the US Fed increased interest rates aggressively over the past year, the value of these bonds plummeted, causing the bank to sell the bonds at high losses and eventually collapse.
This raises the question of how Indian lenders are operating in an environment of rising repo rates.
In this edition of chart of the week, we take a look at the cost of funds (COF) of Indian non-banking financial companies (NBFC). COF is the interest rate at which a bank borrows money from the central bank and other financial institutions to lend to its customers. The general trend is that the higher the repo rate, the higher the cost of funds for banks.
Most NBFCs which witnessed a rise in COF in the past two quarters have been able to maintain their net interest margin (NIM) by increasing customers’ effective interest rates.
Even though Bajaj Finance’s COF has risen for the past two quarters (a QoQ increase of 30 bps in Q3FY23), the lender managed to keep its NIM at Q2 levels. The company’s assets under management (AUM) improved by 27% YoY to Rs 2.3 lakh crore in the same quarter, while its net interest income (NII) grew by 24% YoY.
Cholamandalam Investment & Finance’s COF has also increased by 40 bps QoQ to 6.4% in Q3, for the second consecutive quarter since Q1FY23. However, the lender was able to offset this rise by increasing customers’ effective lending rates and a staggered hike in interest rates across its segments. Its loan disbursements increased by 68% YoY to Rs 17,559 crore in Q3FY23.
Poonawala Fincorp also managed to improve its NIM by 33 bps QoQ in Q3FY23 and loan book by 34.2% YoY to Rs 17,682 crore despite its COF rising 30 bps QoQ to 7.5%.
Piramal Enterprises and Muthoot Finance were the only exceptions to this trend as their COF fell 40 bps and 20 bps QoQ respectively in Q3FY23. This is despite the Reserve Bank of India (RBI) hiking policy repo rates by 40 bps. Muthoot Finance managed to improve its COF by reducing borrowings from bonds while increasing them from banks and financial institutions.
