← Business Metric: Industry Specific (Consumer, Services & Financial) (all topics)
Cost of funds & bond yields
What it is
NBFCs fund themselves through bank borrowing, bonds, commercial paper and securitisation rather than deposits, so their cost of funds tracks market yields and their own credit rating rather than a deposit franchise
The spread over funding cost is the entire margin
Impact on industries
- No deposit franchise means no CASA cushion - every rupee is borrowed at market rates, so a rate cycle hits NBFCs before it reaches banks
- Falling policy rates and bank risk-weight relief on NBFC exposures reduce funding cost directly, expanding spreads without any lending action
- Rating downgrades raise funding cost precisely when asset quality is deteriorating, which is the mechanism behind past NBFC failures
- Sovereign or parent backing delivers AAA funding peers cannot match, while bank refinancing of large borrowers compresses spreads at the top end