In the competitive landscape of Non-Banking Financial Companies (NBFCs), managing borrowing expenditure is a crucial aspect of sustaining profitability and growth. While borrowing is essential for liquidity and expansion, minimizing these costs is equally vital. Here are some actionable techniques NBFCs can consider to trim down borrowing expenses without compromising their operations or growth prospects.
1. Diversify Funding Sources
Relying on a single source for funds can lead to vulnerability during market fluctuations. Exploring multiple funding avenues such as bonds, debentures, and securitization not only broadens the financial base but also mitigates risks associated with any particular source.
In various interviews and forums, Uday Kotak, the founder of Kotak Mahindra Bank has addressed the importance of diversifying funding sources, optimizing debt structures, and implementing efficient asset-liability management to minimize borrowing expenses for NBFCs.
2. Optimize Debt Structure
Restructuring debt by refinancing or renegotiating terms with lenders can significantly lower borrowing costs. Consider adjusting interest rates, tenure, or opting for fixed-rate loans to capitalize on favorable market conditions.
3. Strengthen Credit Rating
Maintaining a robust credit profile enhances credibility in the financial market, potentially lowering borrowing costs. Timely repayments, prudent financial management, and transparent reporting positively influence credit ratings, facilitating access to cheaper borrowing options.
As mentioned by Abhay Bhutada, MD of Poonawalla Fincorp, the rating upgrade testaments the business model and relentless focus on executing the stated strategy to build a strong foundation for a long-term sustainable leadership position in the industry. The rating upgrade helps strengthen the liability franchise, optimise borrowing cost, and accelerate the growth journey.
4. Efficient Asset-Liability Management (ALM)
Balancing short-term liabilities with long-term assets through effective ALM practices reduces dependency on short-term borrowings. Aligning maturity profiles of assets and liabilities minimizes interest rate risks and ensures a steady funding flow.
5. Embrace Technology
Incorporating technological advancements like fintech solutions streamlines operations, reducing administrative costs and improving efficiency. Automated processes in loan origination, underwriting, and collection systems can curtail operational expenses, indirectly impacting borrowing costs.
6. Enhance Risk Management
A proactive risk management strategy helps in identifying and mitigating potential risks that could lead to increased borrowing expenses. Monitoring market fluctuations, liquidity risks, and adopting hedging instruments can safeguard against unforeseen financial challenges.
7. Optimal Utilization of Capital
Efficiently allocating capital across various business segments based on risk-return analysis optimizes resource utilization. Prudent allocation minimizes unnecessary borrowing and maximizes returns, contributing to cost reduction.
Conclusion
Effectively managing borrowing expenditure is a pivotal factor in sustaining the financial health of NBFCs. Diversifying funding sources, optimizing debt structures, and embracing technological advancements are actionable strategies to curtail borrowing costs without compromising growth prospects. By adopting a holistic approach that encompasses prudent financial management and risk mitigation, NBFCs can navigate the financial landscape more efficiently while minimizing borrowing expenses.
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