Kotak warns of modest cost rise for NBFCs if RBI hawkish on rates, but sector growth expected to persist

Kotak Institutional Equities signals a potential 5 to 15 basis point increase in funding costs for non-bank financiers if the Reserve Bank of India adopts a more hawkish stance, but maintains that sector growth should remain resilient amid stable asset quality and loan expansion.

Kotak Institutional Equities has warned that non-bank lenders could face a modest increase in borrowing costs if the Reserve Bank of India turns more hawkish on rates, adding that the impact would likely feed through to margins rather than derail the sector’s growth story. The brokerage said a 50-basis-point rise in the repo rate could lift funding costs for non-banking financial companies by about 5 to 15 basis points.

The assessment comes after the Reserve Bank of India’s Monetary Policy Committee left the policy repo rate unchanged at 5.25% in its August meeting and kept a neutral stance, according to market reports on the decision. Even so, the minutes prompted some concern that policymakers could still be open to a larger increase later, depending on inflation and growth conditions.

Kotak said asset quality will remain the key variable for the sector, but it expects NBFCs to deliver another strong year. Healthy loan expansion and solid first-quarter performance should support results, while most lenders are still expected to post robust growth in assets under management. The brokerage also noted that asset yields will matter for margins, especially if competition limits lenders’ ability to pass on higher costs.

That pressure is not new. Kotak Neo has reported that many NBFCs have already raised retail lending rates or left them unchanged despite earlier repo-rate cuts, as borrowing costs stayed elevated. It said AA-rated NBFCs were paying about 75 basis points more than similarly rated corporates for five-year loans by the end of 2025, highlighting how liquidity and competition for funds have kept funding conditions tight.