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Managing Funding Challenges in the Face of Earnings Decline for NBFCs

The NBFCs sector is currently grappling with a significant challenge: a persistent uptrend in funding costs. Recent data points to a 10-15 basis points (bps) uptick in funding costs during the initial quarter of the fiscal year 2023-24, with projections suggesting a potential escalation of 30-40 bps by the third quarter. This situation has sparked concerns regarding potential downturns in earnings for NBFCs. Nevertheless, in response to this challenge, NBFCs are proactively devising and putting into action various strategies to address and overcome this predicament. This article aims to delve into these strategies, drawing insights from experts within the NBFC sector.

Understanding the Impact

The increase in funding costs poses a significant challenge for NBFCs as it directly impacts their profitability metrics such as net interest margins (NIMs) and overall earnings. With forecasts indicating a sustained increase in funding costs, NBFCs face the looming threat of potential earnings downgrades. These downgrades not only pose immediate risks to their financial health but also erode market credibility over time.

Importance of adopting measures

As a result, it is crucial for NBFCs to adopt proactive measures to safeguard their margins and counteract the adverse effects of rising funding costs. Failing to do so could leave them exposed to heightened market volatility and reduced investor confidence. Therefore, by implementing strategic initiatives aimed at mitigating the impact of escalating funding costs, NBFCs can strengthen their financial resilience and maintain their competitive edge in an increasingly challenging operating environment.

Also Read: Decoding Abhay Bhutada’s Formula For Record-Breaking NBFC Success

Strategic Approaches to Preserve Profitability

Abhay Bhutada, Managing Director of Poonawalla Fincorp, leading the financial institution with strategic planning and vision.

Innovative strategies are emerging within the NBFC sector to address the challenge of rising funding costs. One approach involves targeting creditworthy borrowers. Poonawalla Fincorp, under the leadership of Abhay Bhutada, MD, exemplifies this strategy by concentrating on borrowers with high credit scores. By aligning risk-based pricing with borrowers' credit risk profiles, Poonawalla Fincorp ensures that its lending practices mitigate risks while maximizing returns. This targeted approach enables the NBFC to manage lending risks effectively and optimize profitability, particularly in segments with lower default probabilities. Prioritizing creditworthy borrowers under Abhay Bhutada's leadership establishes a robust foundation for sustainable growth and financial stability.

Transition towards Risk-Adjusted Returns

Another key strategy adopted by NBFCs involves moving from spreads to risk-adjusted returns. By ensuring that returns accurately reflect underlying risks, NBFCs can optimize profitability and maintain sustainable margins. This strategic shift underscores the importance of aligning returns with the inherent risks associated with lending activities. Prioritizing risk-adjusted returns allows NBFCs to allocate capital more effectively, manage risks, and enhance long-term financial resilience.

Also Read: Abhay Bhutada’s Take on the Shape of Credit Growth in 2024

Proactive Measures and Adaptability

Leading players in the NBFC sector, such as Bajaj Finance, are taking proactive measures to address challenges arising from increased funding costs. Anticipating margin moderation in FY24 due to RBI rate hikes, Bajaj Finance led by Rajeev Jain exemplifies the readiness of NBFCs to navigate these challenges. Their proactive stance enables the implementation of preemptive measures to sustain profitability. By openly acknowledging potential margin pressures, NBFCs demonstrate adaptability and resilience. Proactive strategies, including prudent risk management, empower them to navigate market complexities and meet client needs effectively.

Conclusion

The rising cost of funds presents a significant challenge for NBFCs, prompting them to adopt strategic measures to sustain margins and profitability. By leveraging insights from industry experts and implementing proactive strategies such as targeting creditworthy borrowers, transitioning towards risk-adjusted returns, and taking proactive measures, NBFCs can effectively navigate these challenges. This strategic approach positions them for sustainable growth and profitability in the evolving financial landscape.
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