India’s steps to limit riskier bank lending to consumers will hit loan growth, and put pressure on the non-banking sector in particular, an S&P Global report revealed on Friday.
The Indian central bank has increased risk weights on unsecured personal loans, credit cards and lending to non-banking financial companies (NBFCs) by 25 percentage points. This is likely to lead to higher loans, lower credit growth and increase the need for capitalization among weak lenders, it said. The reports project that higher risk weights will ultimately support asset quality.
“Slower loan growth and increased emphasis on risk management are likely to support asset quality in the Indian banking system,” said S&P Global Ratings credit analyst Geeta Chugh.
“However, the immediate impact is likely to be higher interest rates for borrowers, slower loan growth for lenders, reduced capital adequacy and some hit to profits. We estimate that banks’ Tier-1 capital adequacy will decline by around 60 basis points. Finance companies will be worse affected because their incremental bank borrowing costs will increase, in addition to the impact of capital adequacy,” she added.
These changes will not have an immediate impact on our Indian financial sector ratings. This will also not affect our risk-adjusted capital ratio for the rated banks and finance companies, according to the report.
“We apply globally consistent risk weights that reflect our view of underlying asset class risks. For unsecured personal loans from Indian banks and finance companies, we already apply a higher risk weight of 121%,” Chugh said.
Unsecured personal loans and credit card debt have risen rapidly in recent years in India. Such loans grew 26% in the 12 months ending in September 2023. This type of loan, together with consumer durable loans, represented about 9.8% of total loans in the banking system until September 22, 2023, according to the report.
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Updated: 17 Nov 2023, 18:24 IST