Repo Rate Cuts Fail to Ease Borrowing as NBFCs Hike Retail Loan Costs

After the Reserve Bank of India’s (RBI) repo rate cuts, many retail borrowers expected some relief. Instead, several non-banking financial companies (NBFCs) have either raised retail lending rates or held them steady. This comes even after the central bank reduced the repo rate by a cumulative 125 basis points since February last year.

What Is the Reason Behind This?

NBFC borrowing has become more expensive, and the gap is now hard to ignore. By the end of 2025, an AA-rated NBFC was paying about 75 basis points more than an equally rated corporate for a five-year loan. That is the widest premium since March 2022.

Investors typically set internal exposure limits to the NBFC sector. When liquidity tightens and credit demand rises, those limits matter. More NBFCs are lining up for funds at the same time, but the pool of capital is not expanding proportionately. Investors can afford to be choosy, and when that happens, pricing power shifts away from borrowers.

Anil Gupta of Icra Ratings points out that, when liquidity is constrained and borrowing demand is elevated, investors are more careful in choosing where to deploy capital. That selectivity pushes up the cost of funds for NBFCs, regardless of policy rate cuts.

Rate Transmission Stalls Despite Repo Cuts

The RBI’s easing cycle has not translated smoothly into lower borrowing costs for the sector. Even though the 10-year benchmark bond yield has eased modestly and the repo rate has fallen, NBFC funding remains expensive.

Soumyajit Niyogi of India Ratings & Research noted that some NBFCs have raised lending rates, while others have kept them unchanged. In many cases, companies are passing the higher funding burden to customers, while also absorbing part of the pressure in thinner profit margins.

The RBI has acknowledged this pattern before. Monetary policy signals do reach NBFCs, just not fully. Unlike banks, many NBFCs rely heavily on market borrowings rather than low-cost deposits. That makes them more sensitive to investor mood, liquidity cycles, and credit risk perceptions.

Who Takes the Hit?

NBFCs mostly serve the sub-prime and near-prime segments, where lending rates often begin around 12–13%. A 1–1.5% rate increase may not look dramatic on paper, but for households managing tight budgets, it adds up.

Borrowers may not immediately react, but the higher EMI still eats into disposable income. That means less flexibility, less savings, and more vulnerability to shocks.

Industry executives admit the strain as well. A leading NBFC’s finance head recently said that the latest rate cuts have not meaningfully reduced borrowing costs in most cases. The funding side simply hasn’t softened enough.

Margins Squeezed, Competition Intense

Not all NBFCs are passing on the full cost increase. Competition in retail lending remains intense, forcing many players to absorb part of the higher funding expense. This, however, compresses margins at a time when credit growth demands fresh capital and steady balance sheet expansion.

The sector is therefore walking a tightrope: protect profitability and risk losing customers, or hold rates steady and accept weaker earnings.

As liquidity conditions remain tight and investor selectivity persists, funding pressures are unlikely to ease quickly.

Investor Takeaway

Repo cuts do not automatically make NBFCs more profitable. If an NBFC can raise money cheaply and from multiple sources, it has breathing room. It can protect margins. Maybe even stay competitive on loan pricing. The ones depending heavily on market borrowings do not have that luxury right now.

Higher funding costs squeeze spreads. Thinner spreads leave less cushion if borrowers start struggling. And remember, a lot of NBFC customers are already operating close to the edge.

So when you look at an NBFC, do not just track loan growth. Or the headline rate cycle. Watch where the money comes from, what the NBFC pays for the money, and how much room it has if things get tighter.

Sources:

Economic Times

Scanx Trade