MUMBAI: Non-banking financial companies ( NBFCs) are increasingly looking overseas for funds as domestic banks have been slow in passing on the benefits of the recent 50 basis points (bps) repo rate cut, according to experts.
Many banks have only marginally reduced their marginal cost of funds-based lending rate (MCLR) by 5-10 bps, prompting NBFCs to tap into external commercial borrowings ( ECBs), which are 20-30 bps cheaper than domestic loans.
"As long as the Mumbai Interbank Forward Offer Rate (MIFOR) conditions are favourable, I think it will be conducive for NBFCs to raise dollar funding," said Anudeep Ganguli, chief treasury officer, Credit Saison India. "Not too many banks have reduced their MCLR, so until that happens, ECB will still be in favour with NBFCs. Even a 50 basis point cut in the MCLR will still make the ECB more favourable."
In FY25, ECB inflows reached a record $61 billion, with NBFCs accounting for 43% of that, up from an average share of between 20% and 37% over the preceding five years, according to Reserve Bank of India ( RBI) data.ECB has emerged as a cheaper option for NBFCs. There are two main advantages. Firstly, it helps lower the cost of funds, and secondly, lenders are able to diversify their funding mix.
"Even with hedging, there is at least 25 bps cost advantage compared with domestic lending, which has remained elevated despite reduction in policy repo rate," said Jinay Gala, director at India Ratings. "In the last financial year, top-rated NBFCs have seen an increase in the ECBs as part of the overall fund raising by around 200-300 bps."
Gala said: "Lenders in the housing and microfinance business also have access to ECBs from development finance institutions. However, only AA and above rated borrowers have access to cheaper ECB. Lower-rated NBFCs continue to rely on local borrowings, mainly from banks."
Among borrowers, JSW Steel topped the chart in March. The company raised $900 million through ECBs maturing in five months and three months for the purpose of refinancing, RBI data showed.
NBFCs like Muthoot Finance, Housing and Urban Development Corporation, Power Finance Corporation, Hero Fincorp, Cholamandalam Investment and Piramal Capital and Housing Finance were among the other borrowers, according to the central bank's data.
Companies such as Piramal Finance, Shriram Group, PNB Housing Finance and Credit Saison are planning to raise additional funds through QIP in the year.
Industry sources indicated that raising dollar funds has become cheaper for funds that rely on co-lending and have a larger share of unsecured loans in their portfolio.
Typically, when raising dollar funding, companies consider factors such as the MIFOR, the spread, and the forward premium, all of which account for currency risks.
This month, the secured overnight financing rate (SOFR) is approximately 4.31%. For Indian borrowers, the credit spread over SOFR ranges from 135 to 250 basis points, depending on institutional rating. On top of this, forex hedge costs average around 2%. This results in an all-in ECB cost in the 8.0% to 8.5% range.
Lenders are also looking at yen borrowings for ECBs because they are 20-30 bps cheaper compared with dollar-denominated loans.
State-owned HUDCO is planning to raise $500 (dollar equivalent yen) through ECBs in the September quarter, the company's executives had said earlier this month.
Many banks have only marginally reduced their marginal cost of funds-based lending rate (MCLR) by 5-10 bps, prompting NBFCs to tap into external commercial borrowings ( ECBs), which are 20-30 bps cheaper than domestic loans.
"As long as the Mumbai Interbank Forward Offer Rate (MIFOR) conditions are favourable, I think it will be conducive for NBFCs to raise dollar funding," said Anudeep Ganguli, chief treasury officer, Credit Saison India. "Not too many banks have reduced their MCLR, so until that happens, ECB will still be in favour with NBFCs. Even a 50 basis point cut in the MCLR will still make the ECB more favourable."
In FY25, ECB inflows reached a record $61 billion, with NBFCs accounting for 43% of that, up from an average share of between 20% and 37% over the preceding five years, according to Reserve Bank of India ( RBI) data.ECB has emerged as a cheaper option for NBFCs. There are two main advantages. Firstly, it helps lower the cost of funds, and secondly, lenders are able to diversify their funding mix.
"Even with hedging, there is at least 25 bps cost advantage compared with domestic lending, which has remained elevated despite reduction in policy repo rate," said Jinay Gala, director at India Ratings. "In the last financial year, top-rated NBFCs have seen an increase in the ECBs as part of the overall fund raising by around 200-300 bps."
Gala said: "Lenders in the housing and microfinance business also have access to ECBs from development finance institutions. However, only AA and above rated borrowers have access to cheaper ECB. Lower-rated NBFCs continue to rely on local borrowings, mainly from banks."
Among borrowers, JSW Steel topped the chart in March. The company raised $900 million through ECBs maturing in five months and three months for the purpose of refinancing, RBI data showed.
NBFCs like Muthoot Finance, Housing and Urban Development Corporation, Power Finance Corporation, Hero Fincorp, Cholamandalam Investment and Piramal Capital and Housing Finance were among the other borrowers, according to the central bank's data.
Companies such as Piramal Finance, Shriram Group, PNB Housing Finance and Credit Saison are planning to raise additional funds through QIP in the year.
Industry sources indicated that raising dollar funds has become cheaper for funds that rely on co-lending and have a larger share of unsecured loans in their portfolio.
Typically, when raising dollar funding, companies consider factors such as the MIFOR, the spread, and the forward premium, all of which account for currency risks.
This month, the secured overnight financing rate (SOFR) is approximately 4.31%. For Indian borrowers, the credit spread over SOFR ranges from 135 to 250 basis points, depending on institutional rating. On top of this, forex hedge costs average around 2%. This results in an all-in ECB cost in the 8.0% to 8.5% range.
Lenders are also looking at yen borrowings for ECBs because they are 20-30 bps cheaper compared with dollar-denominated loans.
State-owned HUDCO is planning to raise $500 (dollar equivalent yen) through ECBs in the September quarter, the company's executives had said earlier this month.
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