Appliance Makers Brace For A Hit As RBI Tightens Grip On Consumer Credit

Consumer durable makers were rejoicing with sales beating expectations this festive season after months of being under stress. But the central bank's latest norms for lenders on consumer loans could spoil the party.

On Thursday, the Reserve Bank of India raised risk weights on unsecured personal loans, consumer durable loans and credit card dues in a bid to curb aggressive lending in these sectors by both banks and non-banking financial companies. Such loans will now have a risk weight of 125% versus 100% earlier.

The restrictions won't apply for mortgages, loans for vehicle purchases and education as well as debt backed by gold. The circular also stated that credit card receivables of banks will attract a risk weight of 150%, while that of NBFCs will attract 125%.

The measures could have a direct impact on consumer sentiment as loans will get costlier. This, in turn, could hurt the still-fragile sales of televisions to washing machines, according to industry executives BQ Prime spoke with. Other than higher EMIs, consumers could face difficulty in accessing unsecured credit as lenders limit their exposure to such loans, fearing stringent regulatory action as RBI steps up scrutiny on the unbridled growth in unsecured loans even after repeated nudges.

"The RBI's decision to increase risk weight is expected to have a significant impact on consumer durable sales, especially those for bigger ticket sizes," said Arjun Bajaj, director at Videotex International Pvt.—a contract manufacturer of smart TVs for companies like Lloyd, Realme, Toshiba, Hyundai, BPL, and Daiwa, apart from 15 other global and domestic brands.

The move may prompt banks to reassess lending regulations, potentially resulting in higher interest rates and a reduction in financing options, according to Bajaj.

"The accessibility of financing and the availability of affordable interest rates boosted sales of expensive appliances. As a result, it is anticipated that the increased risk weight will have a greater impact on purchase of big appliances than the ones bought with small-ticket loans," he said.

Kamal Nandi, business head and executive vice-president, Godrej Appliances, concurred. "Finance-led purchases account for 40% of the total sales and is a growing proportion. Hence, any move that hikes interest rates has an adverse impact on the industry," he said.

The scale of impact, however, will depend on the extent of the interest hike by banks and non-banks. "We will be monitoring it closely," Nandi said.

The Consumer Electronics and Appliances Manufacturers Association—the apex body for India's Rs 75,000-crore consumer electronics and home appliances industry—has termed the move "unfair".

Credit card usage is concentrated among urban, relatively high-income consumers—the population segment with the deepest pockets and those most likely to spend during the festive season.

CEAMA President Eric Braganza was relieved as the new norms have been notified after the crucial festive period. "We saw about a 20% increase in sales this quarter till Diwali compared to the last," he said. However, Braganza said that while demand typically tapers off till early next year after peaking during Diwali, one has to wait for some more time to quantify the real impact of RBI's move to tighten credit control. "We can't really associate the immediate sales drop post festive season to the RBI's diktat."

Daikin India's Managing Director and Chief Executive Officer Kanwaljeet Jawa also said that it is "unfortunate" as the curbs could potentially hurt consumer sentiment, thereby hitting sales just when the industry was seeing nascent signs of recovery after a prolonged slump. Daikin India saw 15-20% higher sales this festive season.

Retailers are also likely to bear the brunt of the regulatory action imposed by the RBI on Bajaj Finance Ltd. The largest consumer goods financier has been barred from disbursing loans under its two lending products—eCOM and Insta EMI Card, due to non-compliance with digital lending norms.

Bajaj Finance has temporarily suspended issuance of EMI cards to new customers, it said in a regulatory filing on Friday.

According to a top executive at a large electronics retail chain, who didn't want to be identified for speaking candidly, its buyers benefitted from Bajaj's flexible repayment tenure and no-cost EMI options at a time when high inflation weighed on their wallets. The ban is likely to have a severe impact, especially taking away a chunk of online customers, the executive said on the condition of anonymity citing business concerns.

A few companies said that the RBI's move could impact their margin.

"There are several platforms that absorb the costs, and the consumers get to avail no-cost EMI on credit cards," according to Avneet Singh Marwah, director and chief executive officer of Super Plastronics Pvt. SPPL is the exclusive licensee of online-only brands like Thomson, Kodak and Blaupunkt in India.

"For these set of consumers, this move is unlikely to cause any impact. But there are instances when the interest cost is borne by the consumers, and the new RBI norms will mean higher cost for them," he said.

Marwah expects the brands will be left to bear the costs ultimately to push sales as the central bank looks to tame inflation and move towards a saving economy rather than a spending economy.

"The RBI works in a traditional way. And what the RBI or the government doesn't understand is more the burden you give on brands—in terms of higher costs—the consumerism will be hit badly."

The first quarter of fiscal 2024 was challenging for the consumer durable industry as weak consumer sentiment amid an inflationary setting impacted sales of several product categories. Unseasonal rains as well as competitive pricing further added to the woes, with the industry registering a flat volume growth in the April-June period.

Diwali brought some cheer to manufacturers and retailers as demand for mid-to-premium appliances spiked. But RBI's move threatens to stall this momentum.