RBI's Tougher Norms For Consumer Loans Is A Double Whammy For NBFCs, Say Analysts
A higher risk weight implies a higher capital charge against such loans, making them more expensive for lenders to extend.
The Reserve Bank of India raising credit risk weights on unsecured lending is a "double whammy" for non-banking financial companies as it increases capital charges and borrowing expenses, according to analysts
"NBFCs will face higher capital requirements, and their cost of funds is also likely to increase given the higher capital charge borne by the banks," the analysts noted in the report.
A higher risk weight implies a higher capital charge against such loans, making them more expensive for lenders to extend.
On Thursday, the RBI said that consumer credit by banks and NBFCs will attract a credit risk weight of 125%, compared to 100% earlier.
For banks, consumer loans include personal loans but exclude home loans, education loans, vehicle loans and gold loans. For NBFCs, consumer loans include retail loans but exclude housing, educational, vehicle, and microfinance loans, along with lending against gold jewellery.
Similarly, credit card receivables for banks will attract a risk weight of 150%, while those by NBFCs will attract a risk weight of 125%, compared to earlier 125% and 100%, respectively.
"Within the NBFCs, the larger ones are likely to see a greater cost of funds impact as the change in capital charge (from a 25 percentage point increase) would be greater for them versus the smaller NBFCs," Bernstein Research said.
Consumer credit and credit cards have seen significant growth over the past couple of years. The RBI's move is targeted to curb incipient risk building in these segments, analysts said.
However, loans to housing finance companies and NBFCs that are eligible for classification as priority sectors are excluded. Moreover, regulated entities are required to set sectoral exposure limits for consumer credit.
"We expect growth rates for unsecured lending to moderate given regulator's relative discomfort towards these products, which could lead to newer entrants and smaller players actually reducing the aggression," JM Financial said in a note.
Entities with strong capital buffers should be relatively unaffected, it said.
Furthermore, the RBI's move would lead to a greater capital requirement for banks depending on the quantum of the exposures to the segments, according to Shivaji Thapliyal, head of research and lead analyst at Yes Securities.
"(It would also) cause banks to re-assess their growth patterns in the specified loan segments with the potential to pull back growth in these segments, likely on a moderate basis," he added.
Here are some of the key takeaways from analysts:
Bernstein Research
For large private banks, a slowdown in NBFC growth could dampen the overall headline growth, given that loans to NBFCs are a significant component of their loan books.
The capital levels of public sector banks may be stretched, especially SBI.
HDFC Bank, Axis Bank and SBI are rated 'outperform', while ICICI Bank and Kotak Mahindra Bank are rated 'market-perform'.
PayTM is rated 'outperforms', while SBI Cards is 'underperform'.
JM Financial
Larger banks' CET-1 ratios may see a potential overall impact of 70–80 basis points.
Despite a relatively higher share of consumer credit in its asset mix, Bajaj Finance's recent capital raise may cushion its return on earnings.
Treatment of individual loans against property for business purposes is to be watched.
A fallout of the potential growth moderation of unsecured loans could be on lending volumes for Paytm.
Emkay Global
The increase in risk weight will mainly hurt the growth of banks and NBFCs, which have relatively higher exposure to unsecured loans.
Lenders will look to raise lending rates to offset the impact of higher capital charges.
A 100 basis point reduction in growth for large private banks could lead to an impact on return on assets of 3 basis points and a 30 basis point on RoE.
