Concerned about the rapid growth of unsecured loans, the Reserve Bank of India on Thursday decided to increase the risk weights on unsecured credit and bank loans to non-banking financial corporations (NBFCs).
The increased risk weight is applicable to outstanding as well as fresh loans, the central bank said.
While credit growth for the overall banking system has remained stable and healthy, some components of personal loans are nevertheless registering very high growth, RBI Governor Shaktikanta Das said in his previous policy statement.
Das further added that the central bank is closely monitoring any signs of incipient stress.
Thursday’s decision was, therefore, somewhat along expected lines.
However, Dalal Street was not very happy with the same and a knee-jerk reaction was seen among NBFC stocks, with Bajaj Finance, One97 Communications, and SBI Cards and Payment Services shedding more than 2-5%.
Let’s understand a little more about what the implications of RBI’s move could be on the business.
What has changed?
The risk weights on unsecured personal loans and consumer term loans from banks were increased to 125% from 100%, and that on credit cards were increased to 150% from 125%.
Further, the risk weights on the unsecured personal and consumer term loans of NBFCs and credit cards have been increased to 125% from 100%.
The risk weights on loans from banks to NBFCs have been raised by 25 percentage points if the risk weight is below 100%. It should be noted that the risk weights depend on the credit rating of the NBFC.
The RBI has, however, exempted microfinance loans from NBFCs from the risk weight increase.
How big is unsecured credit for banks?
Unsecured credit, excluding microfinance institutions, for large banks is only about 5-13% of their total loans. Further, loans extended to NBFCs constitute another 5-12% for banks.
According to analyst estimates, the share of the total affected book that is NBFC and unsecured loans is the lowest for IndusInd Bank at 10%, and ranges from 15 to 20% for other major banks.
Among NBFCs, the most affected would be SBI Cards, as 100% of the loans are unsecured. The next would be Bajaj Finance as unsecured loans form 38% of the total loan, followed by Aditya Birla Capital with 20% exposure in unsecured consumer loans.
Financial impact for banks/NBFCs
The increase in the risk weights is set to raise the capital requirements of banks, which, in turn, will increase their cost of capital.
The increase in the risk weights could lower the Tier-I capital ratio for banks by 40-80 basis points. However, analysts said all banks are well capitalized to manage this impact.
In case of Bajaj Finance, the Tier-I related impact would be higher at 230 bps, according to CLSA. However, given the company has just raised capital, it is well placed on that front, the brokerage said.
SBI Cards could see a massive impact of over 400 bps on Tier-I ratio to 17%.
While the cost of bank borrowing will rise for NBFCs, analysts are unable to quantify the impact at this point, and would wait for more details to assess the same.
Other Implications
With this move, the RBI is indirectly telling banks to slow down unsecured loans and credit cards. But, the biggest impact of the slowdown would be experienced by single-line companies like SBI Cards, analysts said.
If banks and Bajaj Finance, the largest NBFC player, slow down their unsecured loan growth by 5 percentage points, CLSA estimates the overall impact on loan growth to be only 1-2%. Therefore, the overall credit growth effect would not be significant.
For Paytm, there could be some impact, but that again, will not be significant given that most of its NBFC partners have a small portion of unsecured loans.
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