We are hearing that tightened norms for NBFCs are coming and they could be regulated; something which the governor also referred to over the weekend. If tighter norms are coming, could that impact the cost of borrowing, cost of operations, NIMs and spreads for wholesale NBFCs?
One of the distinct features of NBFCs relative to the banking space is that they enjoy higher NIMs. Along with higher NIMs, they also have higher levels of NPAs. Therefore, if tighter norms do come by and the RBI tries to look at reigning in the buoyancy around the financial services companies including NBFCs, probably what they will do is tighten the provisioning norms.
Not just that, they will also look at introducing some caps on the interest rates that can be charged in the form of spreads. So these two basic ingredients of any NBFC, which is larger or wider NIMs and higher NPAs, is something which will hurt the NBFCs going forward.
If NIMs drop and NPA levels are tightened, it means more provision will be called for because not all NBFCs are really well-capitalised. They always struggle to raise capital. Not only that, even when it comes to raising the capital on the debt side, it becomes a little difficult. Look at some of the NCDs that were recently opened up for subscription. They did not get a great deal of subscriptions or oversubscriptions and that tells you the story in part about what is happening in the NBFC space.
NBFCs will gradually have to yield to better management and tighter controls. That is the journey that has to be completed and it may happen sooner or later. I would not take a call and say it will happen just because the RBI talked about it. But it is on the cards and it is the journey that will get completed.
