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Business Standard
2 days ago
- Business
- Business Standard
Prepayment penalty ban to hurt NBFCs more than banks, say experts
The fee income of banks and non-banking finance companies (NBFCs) will come under pressure following the Reserve Bank of India 's decision to bar prepayment penalties on fresh loans for micro and small enterprises, effective from 1 January 2026. However, the impact on NBFCs will be more significant compared to commercial banks, experts said. NBFCs have around 5-25 per cent of their assets under management (AUM) in floating-rate micro, small, and medium enterprises (MSME) loans, which will be impacted, as the majority of them charge 2-5 per cent prepayment penalties. At the same time, fee income for banks is less than 1 per cent of their total income, so the impact of these changes will be minimal on banks, industry experts said. 'It will have a negative impact on the non-operating income component of the regulated entities, which are focused on MSMEs and have longer-tenured floating-rate loan products,' said Sachin Sachdeva, Vice President, Financial Sector Ratings, ICRA Limited. 'Nevertheless, with these directions, the central bank has tried to harmonise the practice across lenders, given the divergent practices among banks and NBFCs, and at the same time, it increases the affordability of financing for micro and small enterprises,' he added. An exception was made for small finance banks, urban co-operatives, and regional rural banks, as these entities are barred from charging such penalties on loans up to Rs 50 lakh. The directions are applicable irrespective of the source of funds used for prepayment of loans, either in part or in full, and without any minimum lock-in period. NBFCs such as PNB Housing Finance, Aditya Birla Capital, and Piramal Enterprises are expected to be impacted the most, as they account for the majority of floating-rate MSME loans and loans against property (including MSME loans). According to an IIFL Securities report, PNB Housing Finance accounts for 27 per cent of floating-rate MSME loans, followed by Aditya Birla Capital, which holds 26 per cent, and Piramal Enterprises, which accounts for 22 per cent. The report also indicated that there would be a material increase in competitive intensity in loans against property and floating-rate MSME loans, reducing their profitability structurally as exit barriers are removed. 'Banks and large NBFCs with lower cost of funds will be able to partially offset this by increasing the share of more granular and higher-yielding customers within these segments,' the report said. 'Currently, we levy a 4 per cent fee/penalty on full early payment and 2 per cent for part pre-payment. With these changes, we will have to bear a loss of 2-4 per cent,' said an official with an NBFC. Meanwhile, the impact on banks will be limited, as fee income is near 1 per cent of a bank's total income, bankers said. 'As a bank, pre-payment fees account for just 0.5-0.6 per cent of total income, so the impact will be minimal. Earlier, we could enter into a lock-in period for pre-payments; now we have to forego that,' said a senior banking official at a public sector bank. From a customer's perspective, the circular on prepayment charges is a positive move by the regulator to ensure that customers are protected from prepayment charges upon loan closure, said Sanket Agrawal, Chief Strategy Officer, SBFC Finance. 'However, it is important to note that the circular applies to floating-rate loans sanctioned on or after 1 January 2026, which means that the loan book as of today does not get impacted. Also, a borrower does not typically close a higher-tenure loan in the first few years, and therefore the impact of the circular on prepayment fee income of finance companies will be at a lag. This circular helps borrowers access credit at a fair price in their long-tenure repayment cycle,' he said.
Economic Times
18-06-2025
- Business
- Economic Times
Lending yields set to shrink in FY26 as banks play it safe
"The steep cut in repo rate is expected to sharply impact the net interest margins of the banks and Q2FY26 is expected to be the weakest," said Sachin Sachdeva, sector head, financial sector ratings at ICRA. Mumbai banks anticipate lower lending yields this fiscal year. Caution in unsecured loans and slower retail growth contribute. Policy rate cuts also play a role. Analysts predict a yield drop to 8.6%. Net interest margins may contract. Repricing of loans linked to external benchmarks will impact private banks. Deposit repricing lags will further squeeze margins. Tired of too many ads? Remove Ads Tired of too many ads? Remove Ads Mumbai: Banks are expected to face downward pressure on lending yields in the current fiscal year amid growing caution in the unsecured lending space, a slowdown in high-yield retail loan growth, and lower policy rates. Analysts forecast that the yield on advances could drop by around 50 basis points year on year to 8.6% in the coming months-against a peak of 9.48% in FY24-as banks increasingly shift focus to lower-risk, lower-return assets in response to evolving credit net interest margins (NIMs) are also projected to contract by 20-25 basis points year on year in FY26, they said. "The yield on advances will drop in FY26, as loans linked to the repo rate will be re-priced downward immediately, while those linked to EBLR (external benchmark lending rate) will adjust over the medium term," said Sanjay Agarwal, senior director at CareEdge Ratings "Banks remain cautious about lending to unsecured, high-yielding asset classes. There could be some competition with the slowing credit growth resulting in softening yield on advances," he to data from CareEdge Ratings, private sector banks saw their yield on advances fall from 10.95% in FY24 to 10% by the end of FY25. The rating agency expects this figure to decline further to 9.64% in FY26, highlighting the sector-wide impact of monetary Reserve Bank of India (RBI) had raised the repo rate by 250 basis points through FY23, which was held steady at 6.50% until February 2025. This tightening phase had enabled banks to pass on higher borrowing costs, boosting lending yields. However, with a 100-basis point cut in repo rate in five months, the trend is re-pricing of EBLR-linked loans, especially prevalent in private sector banks, where 86% of the loan book is tied to EBLR, will further weigh on yields. These banks, which also have higher credit-to-deposit (C/D) ratios, are likely to face greater margin pressure compared to their public sector rates fall, a structural lag in deposit repricing is expected to put additional pressure on net interest margins. In a falling interest rate environment, lending rates tend to adjust more quickly than deposit costs, particularly fixed-term deposits, which are typically repriced with a delay of two to four quarters."The steep cut in repo rate is expected to sharply impact the net interest margins of the banks and Q2FY26 is expected to be the weakest," said Sachin Sachdeva, sector head, financial sector ratings at ICRA
Time of India
04-06-2025
- Business
- Time of India
Share of high cost deposits double in two years
The share of term deposits earning 7% and above has more than doubled to 72.94% in March, latest central bank data showed. Rates climbed as banks competed for funds amid a cumulative 225 225 basis point increase in the previous cycle of rate hardening, which sought to restrain inflation spawned by the Covid-era policy easing. One basis point is a hundredth of a percentage point. Experts said the trend also marks a shift away from retail to bulk deposits, and despite the start to an easing cycle, deposits would continue to be costly through FY26, potentially crimping margin expansion at mainstream lenders. 'Besides the transmission of rate hikes in the cost of deposits continuing until FY25, the share of pricier bulk deposits had also been rising for the last few years,' said Sachin Sachdeva, vice president, sector head - financial sector ratings, Icra . The flow of funds from retail investors to capital markets (debt or equity) led to a change in the composition of deposits (from retail to wholesale). Live Events 'Consequently, the banking sector witnessed persisting high cost of deposits in FY25,' explained Sachdeva. The number of demat accounts and mutual fund contributions have continued to hit successive records since the pandemic, indicating both financialization of savings and an evident deepening of the equity culture that intensified competition for deposits. With high-cost deposits accounting for close to three fourth of the deposits mobilised by the commercial banks, there could be pressure on the interest income margins even in FY26, as the impact of the recent 50 bps rate easing would impact the deposit costs only with a lag. 'As for the outlook for FY26, even though the rate cycle has reversed…, the transmission of these (cuts) into reduced cost of deposit would happen with a lag unlike in the case of transmission in lending rates, which happens faster, given high share of external benchmark linked loans' said Sachadeva 'Hence, interest margins for banks are likely to compress by around 10 bps in FY26.' Even the central bank's latest Financial Stability Report acknowledges the shift toward high-cost deposits. 'Against the backdrop of the recent monetary policy tightening cycle in India, bank deposits continue to exhibit double digit growth, but their profile has gradually shifted toward schemes offering higher returns,' said the report.
