New Delhi: The cost of funds for non-banking finance companies (NBFCs) and housing finance companies (HFCs) is expected to rise marginally over the medium term, according to India Ratings and Research (Ind-Ra).
The agency cited global uncertainties, geopolitical tensions, and weak transmission of policy rate cuts as key factors that could keep borrowing costs elevated.
Weak Transmission of Rate Cuts a Key Concern
Despite recent policy rate cuts, Ind-Ra noted that borrowing costs are unlikely to soften significantly. This is primarily due to limited transmission of rate cuts by banks, increased competition for deposits, and cautious capital market conditions.
These factors are expected to restrict any meaningful decline in funding costs for NBFCs and HFCs.
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Bond Market Pressures and Global Risks
The agency highlighted that wider spreads in bond markets—driven by geopolitical tensions and uncertain macroeconomic conditions—are contributing to higher funding costs.
Additionally, volatility in global markets and currency fluctuations are likely to keep external commercial borrowings (ECBs) relatively contained in the near term.
Shift in Funding Mix Expected
Ind-Ra expects a gradual shift in the funding mix of NBFCs towards bank borrowings. This trend is being driven by relatively stable pricing in bank lending compared to softer activity in bond markets.
The agency emphasized that sector dynamics will be shaped more by changes in funding sources rather than liquidity stress.
Bank Lending to NBFCs Sees Sharp Growth
Bank lending to NBFCs has witnessed significant growth, rising 19.1% in February 2026 compared to 6.4% a year earlier. This indicates increasing reliance on bank funding amid moderation in capital market-based financing.
Experts Highlight Rising Borrowing Costs
Karan Gupta, Director – Financial Institutions at Ind-Ra, said that incremental borrowing costs are likely to trend upward.
He attributed this to wider bond spreads caused by geopolitical tensions, as well as banks raising marginal cost of funds-based lending rates (MCLRs) due to elevated loan-to-deposit ratios and selective increases in deposit rates.
Outlook: Gradual Increase in Costs
Overall, the report suggests that NBFCs and HFCs may face a gradual uptick in funding costs in the near-to-medium term. While liquidity conditions remain stable, evolving global and domestic factors are expected to influence borrowing costs and funding strategies.
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