The Reserve Bank of India (RBI) has directed NBFCs to increase the risk weight on loan exposure to 125% from its earlier 100% while the risk weight on the credit card receivables of NBFCs to 125% from earlier 100%. While for the SCBs, it increased to 150% from earlier 125%.
In its circular RBI referred to Governor’s statement on October 6, where he flagged the high growth of some components of consumer credit and advised banks and NBFCs to strengthen their internal surveillance mechanisms, address the accumulation of risks, if any, and establish appropriate safeguards. , in his own interest.
Also Read: RBI increases risk weight on consumer credit, bank credit to NBFCs
Poonawalla Fincorp in its regulatory filing stated that the increase in the risk weight from 100% to 125% on the Company’s consumer credit exposure will be marginal and is expected to be around 220 bps. With this the resulting capital adequacy would become ~ 40%, still significantly higher than the regulatory requirement of 15%.
“According to our long-term plans as well, we do not expect our debt equity to go beyond 4x. Given our strong capital adequacy, either immediately or in the foreseeable future, we do not expect any impact of the increased risk weights on our growth trajectory and profitability,” it said.
Taking it to social media platform LinkedIn, Anagha Deodhar, Chief Economist at ICICI Bank said that RBI’s decision was long overdue. In the last MPC, there were expectations that the central bank could raise risk weights on personal loans, credit cards and other categories of unsecured loans, which have registered high growth.
“Currently, banking services credit portfolio is INR 40 trillion. Of this, NBFCs account for INR 14 trillion or 35%. During April 2022 to September 2023 (a period marked by double-digit growth in service credit), total service loan book grew 20% YoY while credit to NBFCs grew at a much faster rate of 27%. As NBFCs account for more than a third of service credit, this segment alone accounted for half of service credit growth during the said period. Moreover, the latest Monetary Policy Report shows that within NBFCs s, the credit growth of HFCs is slowing down while that of non-HFC NBFCs is picking up,” she said.
Given the profile of borrowers and higher lending rates, shadow banks and unsecured loans are particularly vulnerable to tighter financial conditions. The RBI’s foreign policy decision to raise risk weights on these categories shows that the central bank is paying attention to maintaining financial stability, she added.
Speaking about the development, Gurjot Singh, co-founder, Collekto said, “The increase in risk weights will affect the capital adequacy of lenders, thus making them set aside more capital for such loans. Majority of the online lending applications raise capital from other NBFCs or Banks.”
“NBFCs whose capital mix is skewed towards bank loans will suffer a two-fold impact. One – they will have to set aside additional capital for lending in the unsecured category and secondly, the banks that lend to them will also have to set aside additional capital, thus leading to higher cost of capital. Since majority of online loan programs cater to consumer loans, the overall demand for such loans could decrease as they are non-essential in nature. For the existing loans, the ROI (Interest) will increase and affect the creditworthiness of the borrowers who is at the higher end of the debt-to-income ratio.”
Delinquency numbers for unsecured loans below Rs.50,000 were already at 5.4%. The significant increase in crimes in unsecured retail segment has led the regulator to take measures to create a stable environment for Indian economy as compared to its counterparts. This will increase as the number of borrowers who default will increase and at the same time fresh lending will decrease, he added.
Jyoti Prakash Gadia, Managing Director at Resurgent India said, “These unsecured consumer loans carry a higher risk of default, creating a potential glut of potential NPAs. The RBI has rightly taken a cautious step to increase the risk provision by 25%. This is likely to work as a deterrent against rampant growth in unsecured loans and will make such loans more expensive for consumers as overall supply will also decrease. A timely step in the right direction at this time.”