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With more rating cuts in sight, NBFCs’ cost of funding may rise

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With more rating cuts in sight, NBFCs’ cost of funding may rise

Only specific solutions to rescue the sector can stem the panic and stop a contagion: Expert

The Reserve Bank of India may have cut interest rates thrice this year, but that’s no respite for NBFCs which are facing crisis of confidence. Cost of funding for a majority of them may be set to jump with more rating downgrades in sight amid no bailout from the RBI.

The Monetary Policy Committee of RBI has cut repo rate by 25 basis points last week and changes its stance on liquidity from neutral to accommodative.

“Due to risk aversion by larger market segment of investors class specially institutional side, credit spread for more leveraged ones and non AAA NBFC may widen and miss the advantage of rate cuts,” said Ajay Manglunia MD and head institutional fixed income at JM Financial Products Limited.

Post rate cut and change of stand from neutral to accommodative, the rates have rallied and yields down by 8-10 bps. This kind of rally may continue and gain moment in down side post budget with improvement in flows from foreign portfolio investors.

RBI has assured of maintaining adequate system liquidity. With 21 basis points decline in the weighted average lending rate on fresh rupee loans since January, the central bank felt monetary policy transmission has been faster than earlier.

“A more focused approach is needed to address issues in NBFC and Housing Finance, failing which transmission of lower rates to end-borrowers may not happen fast enough,” said Mihir Vora, director, Max Life Insurance.

Though no specific measure was announced to provide immediate relief to the troubled NBFC sector, RBI Governor Shaktikanta Das said they will do whatever it takes to ensure financial stability of the system.

“Specific and targeted solutions to rescue these besieged sectors alone can stem the panic and stop a further contagion,” said Ajay Bodke, CEO and Chief Portfolio Manager, Prabhudas Lilladher.

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