RBI Rate Hike May Not Be a Major Headache for NBFCs, Report Suggests

The Reserve Bank of India's (RBI) potential rate hike may not have a widespread impact on the loan quality of non-banking financial companies (NBFCs), according to a recent report by Nuvama Institutional Equities.

The report, released on October 3, suggests that while a rate hike could potentially cause stress for select NBFC segments, the overall impact on the sector is likely to be limited.

Nuvama bases its view on the current healthy loan quality of NBFCs, which have strong capital, solid provisions, and plenty of cash in the system. This, the report argues, will help protect their overall bad loan numbers.

In fact, during the FY22-24 cycle, when the repo rate rose by 2.5 percentage points, NBFC loan quality actually improved. Bad loans fell from 5.7 per cent in March 2022 to 4.6 per cent in March 2023.

Nuvama notes that monetary tightening by itself has not been sufficient to hurt the whole sector, and that stress usually builds when rate hikes come with long external shocks or cash shortages.