Banks to hike interest rates on NBFC loans

MUMBAI, October 24: Yet another shock is in store for non-banking finance companies (NBFCs). Banks are likely to hike the interest rates on...

MUMBAI, October 24: Yet another shock is in store for non-banking finance companies (NBFCs). Banks are likely to hike the interest rates on advances to NBFCs following the mass downgrading of 14 NBFCs by Crisil on Thursday. These NBFCs may also find it difficult to raise funds through the fixed deposit (FD) route at the retail level.

Bankers said that they will have to hike the interest rates on advances to NBFCs that have been downgraded. “According to our internal guidelines, we will have to hike interest rates on exposures to the NBFC sector according to the level of their downgrades,” said a source at Bank of Baroda. Crisil had downgraded leading NBFCs like Kotake Mahindra, 20th Century Finance, Alpic Finance and Anagram Finance on Thursday.

The drama on the sudden downgradation of a clutch of top non-banking finance companies’ (NBFC) has taken a new twist with ICRA ruling out the possibility of revising 20th Century Finance Corporation’s fixed deposit (FD) programme downwards even as the industry is yet to get over the shock. Icra reaffirmed the AAA rating assigned to 20th Century on October 21 — two days before Crisil downgraded it. "There is no question of reviewing the TCFC rating.

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Crisil may have its own reasons for downgrading it. We assign ratings based on independent decisions and stand by it," said sources at Icra.

Panicky over the Crisil move, the Association of Leasing & Financial Services Companies (ALFS) has decided to call a meeting with all the three rating agencies sometime next week. Crisil said it will stick to the ratings it has assigned.

A section of the industry feels that the NBFC sector in the country is generally over-rated. "While there are a whole lot of NBFCs in the country carrying AAA ratings, the highest rating that finance companies abroad get is AA," said a source on condition of anonymity.

On the lending front, some banks have said that they will examine the performance of the NBFCs on a case to case basis and then decide if interest rates on advances should be hiked. Federal Bank, which has the highest exposure among banks to the NBFC sector at Rs 360 crore, has said that it carries out its own review of the performance of NBFCs and then lends to them. The bank has exposures to three of the NBFCs that have been downgraded — Dhandapani Finance, Ashok Leyland Finance and Anagram Finance.

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Subodh Shah, executive director of Crisil feels that since most of the NBFCs have been downgraded, they will not have much of a problem with bank finances.

“We have downgraded most of these companies by just one notch so this should not increase their cost of finance. However, retail investors may begin to shy away from these companies,” he said.

“The stock markets have already discounted the NBFC sector during the CRB scam, " said another analyst.