The central bank on Thursday raised risk weights against unsecured loans and loans to non-bank lenders, forcing lenders to set aside more capital and apply brakes on such lending. However, as markets anticipated a rise in interest rates on unsecured loans, analysts believe that much of the market impact occurred on Friday and that further declines, if any, would be limited.
Indices representing financial stocks fell, led by State Bank of India, Axis Bank, ICICI Bank and Bajaj Finance Ltd. The Bank Nifty fell 1.3%, the most in more than two weeks, while the Finnifty, which comprises NBFCs and insurers, fell 0.9%. The Nifty PSU Bank index comprising SBI, Indian Bank, Bank of India, Punjab National Bank, Bank of Baroda and Canara Bank fell 2.39%, also the most in two weeks.
Foreign brokerage CLSA said it estimates a direct impact of 40-80 basis points (bps) reduction in tier-I capital for banks and 230-415 bps reduction for Bajaj Finance and SBI Cards and Payment Services. However, banks are still likely to be well capitalized and should not raise additional capital, it said.
“The other direct impact would be an increase in the cost of borrowing for NBFCs (which is difficult to quantify). We expect the indirect impact to be a moderation in unsecured loan growth for banks over the coming quarters. It could also impact fintech growth rates -intermediaries like Paytm, though we don’t think the impact would be big,” a CLSA report said.
A Macquarie Capital Securities report said bank loan growth could fall by around 200 bps due to the new rules.
RBL Bank, SBI Cards and Aditya Birla Capital, which are not part of the Nifty, plunged 5-8% as bears overtook selling positions. Cholamandalam Finance fell 3.5%, while Shriram Finance shed 2.34%.
Stocks like RBL Bank and SBI Cards could face continued pressure with their open interest or outstanding positions on their futures contracts rising. An increase in open interest accompanied by a drop in prices signals bearish sentiment. Top brokers believe that NBFCs will be more affected by the latest measures than banks that are well capitalized.
Calling it a “positive move” to ensure prudent growth in unsecured lending, SBI Cards said the measure will reduce the company’s capital adequacy by around 4%. In a stock exchange disclosure, it said the company is well capitalized, and if necessary. , will increase its tier-2 capital.
State Bank of India expects a minimal impact on its capital ratios, President Dinesh Khara told Reuters. The impact of the increased risk weight on personal loans, including credit cards, will be 55-60 bps, he said, adding that even after accounting for the increased capital requirement, SBI has enough buffers and does not see the need to boost fund. -lifting
“Capital requirements have not been tightened for car loans, home loans, gold loans; so, core sectors responsible for growth in the economy are unaffected,” Khara said, adding that he does not expect the central bank to tighten capital requirements for any of these segments.
The growth in some unsecured loans – loans not backed by collateral – outpaced overall credit growth by a wide margin. For example, the outstanding credit card rose 30% year-on-year (joy) in September, other personal loans grew 25% and consumer term loans increased 11%. Overall bank credit growth was 20% in the same period, RBI data showed.
Banks will have to raise lending rates to maintain risk-adjusted returns, said Virat Diwanji, group president and head of consumer banking at Kotak Mahindra Bank. “At this stage, it is safe to assume that lending rates may rise anywhere between 40 and 75 bps, but the actual scenario will be market-based. This move certainly has an impact on lenders’ ROEs. In short, this move is likely to meet the desired target of prudent unsecured lending and this may slow the growth of unsecured lending over the next three to six months. This move will push lenders to opt for credit in the unsecured space,” Diwanji said.
Poonawalla Fincorp, a non-bank lender, said the impact on its consumer credit exposure may be around 220 bps.
“With this, the resulting capital adequacy would become approximately 40%, still significantly higher than the regulatory requirement of 15%,” the company said in a press release. “Given our strong capital adequacy, either immediately or in the foreseeable future, we do not expect any impact from the increased risk weights on our growth trajectory and profitability,” it added.
The RBI move came after several warnings to banks and NBFCs about a possible crisis in the unsecured loans segment. Banks have seen this loan portfolio more than double ₹6 trillion in FY19 to ₹13 trillion as on 30 September 2023. Credit card outstanding loans also jumped 144% to ₹2.2 trillion over the last four years. Bank credit to NBFCs also saw 30% growth in the second quarter of FY24, against 14% in other bank loans.
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Updated: 17 Nov 2023, 23:49 IST