NBFC Treasuries on the Edge: Strategies to Survive Margin Squeeze and Refinancing Risk

Non-Banking Financial Companies (NBFCs) occupy a crucial yet uniquely fragile position in the financial ecosystem. Unlike traditional banks, NBFCs rely heavily on market borrowings, commercial paper, and debentures rather than stable customer deposits. While this allows for greater agility in lending, it exposes them directly to the brutal volatility of the debt and money markets.

Today, the corporate treasury function within NBFCs is under extreme duress, squeezed by two existential threats: margin squeeze and refinancing risk.

The current environment—characterised by rising interest rates, global liquidity tightening, and increased regulatory scrutiny—has turned every treasury operation into a high-stakes survival exercise. Relying on outdated treasury management system platforms built for slower, simpler times is no longer viable. The difference between survival and failure lies in adopting modern treasury management solutions capable of providing real-time risk intelligence and automation.

The Twin Crises: Margin Squeeze and Refinancing Risk

The specific business model of an NBFC makes it inherently vulnerable to shifts in capital markets.

1. The Margin Squeeze Battle

An NBFC’s profitability is defined by the spread between its cost of funding (the interest it pays to borrow) and its yield on assets (the interest it earns from lending).

When central banks hike policy rates, the NBFC’s cost of funding—especially for short-term instruments like commercial paper (CP)—rises almost immediately. However, the interest rates on their long-term loans (e.g., housing or vehicle finance) are either fixed or slow to adjust. This mismatch leads to an immediate, painful compression of Net Interest Margin (NIM).

To mitigate this, NBFCs must become masters of operational efficiency and funding cost optimisation. As McKinsey & Company notes, only 30 per cent of banks that have undergone a digital transformation report successfully implementing their digital strategy, and the majority fall short of their stated objectives, highlighting the huge cost advantage digital infrastructure brings to the margin battle. For NBFCs, leveraging automation within the treasury management system to optimise every basis point of funding cost is non-negotiable.

2. The Refinancing Risk Vortex

Refinancing risk is arguably the more lethal threat. Due to their dependency on capital markets, NBFCs often rely on rolling over short-term debt to fund long-term assets. In a tight market, this rollover is never guaranteed. If market sentiment sours, or if a global liquidity crunch hits, an NBFC might suddenly find itself unable to raise new funds at a viable rate—or at all—to repay maturing obligations.

This requires the treasury to have a dynamic, multi-scenario view of its debt maturity profile, well beyond what traditional treasury management solutions can offer. The treasurer must constantly model the impact of different funding sources (banks, mutual funds, bond markets) under various stress scenarios to avoid a crippling liquidity shortfall.

The Technology Deficit: Why Legacy Systems Fail NBFCs

The challenges facing NBFCs are intrinsically linked to the limitations of their legacy treasury management system. These systems were designed primarily as static reporting tools, incapable of the speed and integration required for modern risk management.

1. Siloed Data and the ALM Blind Spot:

An NBFC’s sustenance is Asset-Liability Management (ALM). However, the majority of legacy systems maintain the assets (loans, leases) and the liabilities (debt, commercial paper) in distinct, unconnected databases. The treasury is compelled to manually extract and consolidate data in spreadsheets in order to conduct fundamental ALM analysis. This implies that the data is already obsolete by the time the ALM report is finalized, as the market has changed.

2. Manual and Reactive Debt Management:

Managing thousands of debt instruments, including commercial paper issuance cycles, term loan covenants, and redemption schedules, is a full-time job. Legacy platforms require manual tracking of covenants, alerting systems based on fixed, arbitrary dates, and batch-processed amortisation schedules. This introduces high operational risk and significantly slows down crucial refinancing decisions.

3. Inadequate Liquidity Forecasting:

The essential requirement for strong liquidity management systems is shown by Forrester’s assessment that only 38% of financial institutions think their current treasury and risk technologies can withstand abrupt, high-impact market shocks. Conventional methods use basic deterministic models and historical trends to determine liquidity. They are unable to carry out the dynamic, predictive scenario modeling necessary to evaluate the impact of an abrupt regulatory change on collections or the impact of an emergency refinance at a 500 basis point premium.

Strategic Imperatives: Building Resilience into the Core

To transition from mere survival to sustainable growth, NBFC treasuries must prioritise three strategic moves, leveraging technology to manage volatility proactively.

1. Mandatory Real-Time ALM and Risk Aggregation

The first step is achieving a single, real-time, aggregated view of the balance sheet. An integrated treasury management system must automatically draw data from the asset system (core loan ledger) and the liability system (debt management module) continuously.

This allows the treasurer to measure the duration gap and interest rate sensitivity instantly, facilitating dynamic hedging decisions. The goal is to move beyond monthly ALM reports to continuous ALM, where the system automatically alerts the treasury to any covenant breaches or dangerous duration mismatches as they occur.

2. Dynamic Scenario Modelling and Liquidity Stress Testing

A top treasury management system cannot just report on cash; it must predict it. NBFCs need advanced modelling tools that allow the treasury team to run hundreds of stress scenarios:

• Refinancing Scenario: Modelling the cost and probability of refinancing $500 million of debt under interest rate shocks of +100 to +500 basis points.
• Collections Shock: Modelling the impact on cash inflows if collections drop by 20% due to an economic downturn.
• Funding Mix Optimisation: Using AI/ML to recommend the optimal mix of funding sources (e.g., term loans vs. CP vs. NCDs) to minimise weighted average cost of capital while adhering to regulatory concentration limits.

3. Automated Compliance and Investor Relations

NBFCs face unique regulatory reporting frequencies (often daily or weekly) for liquidity and provisioning. A modern top treasury management system must automate this reporting directly from the source data, eliminating manual compilation errors. Furthermore, the debt module should automatically track and report compliance against hundreds of specific covenants (e.g., Debt-to-Equity ratios, capital adequacy) and alert the treasurer before a breach occurs, mitigating refinancing risk by maintaining investor confidence.

The Composable Answer: eMACH.ai Treasury Solutions

The solution is not just an upgrade, but a fundamental architectural shift. eMACH.ai Treasury is engineered as a future-proof, integrated treasury management system designed specifically for the volatility and regulatory demands of modern financial services. As one of the top treasury management systems providers, its framework (Events-driven, Microservices, API-enabled, Cloud-native, Headless, and AI-infused) is the answer to the NBFC liquidity crisis:

• Events-driven Real-Time Risk: The platform is built to react instantly. If a debt maturity event or a key covenant compliance threshold is crossed, the system generates an immediate, prioritised action, ensuring the treasury can execute a liquidity plan in minutes, not hours.
• Embedded AI for Predictive ALM: AI is integrated to analyse complex market data and internal cash flow patterns. It provides sophisticated forecasting models that automatically factor in regulatory changes and market volatility, giving the NBFC a forward-looking view of its margin and refinancing risk.
• Microservices and APIs for Composability: eMACH.ai’s architecture allows the NBFC to use a “best-of-breed” strategy. They can integrate the core debt management module with advanced third-party Treasury Management Solutions for specialised tasks like credit card processing for small businesses (if applicable) or deep ALM modelling, without needing to overhaul the entire platform. This agility minimises vendor lock-in and maximises innovation.
• Centralised Liquidity Hub: The system acts as a single, central hub for all funding and investment activities, consolidating cash positions across all bank and investment accounts for a continuous, accurate view of global liquidity, essential for managing daily refinancing needs.

By adopting this next-generation approach, NBFCs can transform their treasury from a reactive cost centre into a strategic engine of stability, ready to navigate the tight margins and high-stakes refinancing cycles of the modern financial world.

Frequently Asked Questions

Q1: How does an eMACH.ai integrated treasury management system specifically help combat margin squeeze?

A: It combats margin squeeze primarily through optimisation and efficiency. The system automates up to 95% of routine debt and payment processing tasks, significantly reducing operational costs. More importantly, its AI engine analyses funding options in real-time, recommending the optimal mix of short-term (like CP) and long-term debt to minimise the weighted average cost of capital, directly widening the NIM.

Q2: Since NBFCs rely heavily on commercial paper (CP), how does the system reduce the risk associated with CP rollover?

A: eMACH.ai Treasury automates the entire CP lifecycle. It provides an immediate, visual debt maturity ladder, constantly highlighting potential rollover gaps. The system uses AI to model market sentiment and suggest proactive refinancing windows, ensuring the NBFC can secure new funding before the existing CP matures, thus mitigating the high risk of failure-to-refinance.

Q3: How does the platform handle the intense regulatory reporting frequency required for NBFCs?

A: The platform’s Events-driven architecture ensures that data is ingested and processed in real-time. It contains pre-configured templates for regulatory reporting (e.g., liquidity coverage ratios, ALM returns). Automating the collection, aggregation, and population of these templates it reduces the reporting time from days to minutes, ensuring accurate and timely compliance and reducing the risk of fines.

Q4: For an NBFC looking to manage different business lines (e.g., retail vs. corporate lending), can the top treasury management system handle the complexity?

A: Absolutely. eMACH.ai Treasury is built with multi-entity and multi-business line segmentation in mind. It provides segregated views for risk and liquidity management across different lines (e.g., a corporate lending portfolio versus a retail home loan book) while still maintaining a consolidated, enterprise-wide liquidity view for the CFO. This segmentation allows for precise ALM analysis tailored to each unique business model.