New Delhi: A proactive step has been taken aimed at mitigating potential systemic risks associated with rapid growth consumer loansReserve Bank of India (reserve Bank of India) has imposed stringent measures affecting both banks and non-bank financial institutions (NBFIs).
Fitch Ratings has provided information on the consequences of these regulatory adjustments on the financial sector.
The central focus of the regulatory adjustment is to force banks and NBFIs to allocate more capital towards unsecured consumer loans.
Fitch Ratings views these changes as a credit-positive effort by regulatory authorities to control emerging risks in consumer credit.
Notably, the growth of unsecured credit card loans and personal loans by banks in the first half of the financial year ending March 2024 witnessed an impressive growth of 29.9 per cent and 25.5 per cent respectively on a year-on-year basis.
This surge in consumer credit raised concerns, leading to the need for preventive measures.
The increasing exposure to unsecured consumer loans, considered a risky credit category, indicates higher risk appetite among banks and NBFIs.
This trend is attributed to institutions looking to protect net interest margin (NIM) amid stiff competition for secured retail loans.
Regulatory changes introduce aligned higher risk weights for both banks and NBFIs. While the risk weight for credit-card loans for NBFIs has increased to 125 per cent (from 100 per cent earlier), banks maintain it at 150 per cent.
Microfinance is excluded from the higher risk weighting for NBFIs, which differentiates it from banks.
Fitch Ratings estimates that these measures could reduce the banking system’s Common Equity Tier 1 (CET1) ratio by approximately 30 basis points.
The impact varies from 6 to 34 basis points for Fitch-rated banks, with a double-digit impact expected for private banks like State Bank of India (SBI) and Canara Bank.
Private banks with relatively better CET1 capitalization are expected to maintain appropriate capitalization even after the changes.
However, these measures may not reduce the banks’ capital score or standalone viability rating (VR), although SBI’s VR headroom may be reduced.
Fitch-rated NBFIs, including Shriram Finance Ltd, Muthoot Finance Ltd, IIFL Finance Ltd and Manappuram Finance Ltd, see impact on capitalization ratios. credit enhancementand future asset quality.
Although the overall impact is expected to be limited, these institutions will benefit from lower systemic risk.
NBFIs may experience an increase of 40 to 60 basis points in bank funding costs. It is believed that banks pass on capital cost to NBFIs by higher risk weight on loans.
Larger NBFIs are in a better position to negotiate favorable terms with banks, while lower rated institutions may face higher increases.
Loans to housing finance companies and NBFIs eligible for priority sector classification have been excluded from the adjustment, which will benefit institutions like Shriram due to their priority sector exposure.
The regulatory changes aim to strike a balance between promoting consumer credit growth and preventing the build-up of systemic risks.
The phased implementation of these measures underlines the regulators’ commitment to maintain financial stability Whereas financial institutions have been given time to adopt the new norms.
As India’s financial landscape undergoes these adjustments, stakeholders are closely monitoring the impact on lending practices, risk management and overall economic resilience.
Fitch Ratings has provided information on the consequences of these regulatory adjustments on the financial sector.
The central focus of the regulatory adjustment is to force banks and NBFIs to allocate more capital towards unsecured consumer loans.
Fitch Ratings views these changes as a credit-positive effort by regulatory authorities to control emerging risks in consumer credit.
Notably, the growth of unsecured credit card loans and personal loans by banks in the first half of the financial year ending March 2024 witnessed an impressive growth of 29.9 per cent and 25.5 per cent respectively on a year-on-year basis.
This surge in consumer credit raised concerns, leading to the need for preventive measures.
The increasing exposure to unsecured consumer loans, considered a risky credit category, indicates higher risk appetite among banks and NBFIs.
This trend is attributed to institutions looking to protect net interest margin (NIM) amid stiff competition for secured retail loans.
Regulatory changes introduce aligned higher risk weights for both banks and NBFIs. While the risk weight for credit-card loans for NBFIs has increased to 125 per cent (from 100 per cent earlier), banks maintain it at 150 per cent.
Microfinance is excluded from the higher risk weighting for NBFIs, which differentiates it from banks.
Fitch Ratings estimates that these measures could reduce the banking system’s Common Equity Tier 1 (CET1) ratio by approximately 30 basis points.
The impact varies from 6 to 34 basis points for Fitch-rated banks, with a double-digit impact expected for private banks like State Bank of India (SBI) and Canara Bank.
Private banks with relatively better CET1 capitalization are expected to maintain appropriate capitalization even after the changes.
However, these measures may not reduce the banks’ capital score or standalone viability rating (VR), although SBI’s VR headroom may be reduced.
Fitch-rated NBFIs, including Shriram Finance Ltd, Muthoot Finance Ltd, IIFL Finance Ltd and Manappuram Finance Ltd, see impact on capitalization ratios. credit enhancementand future asset quality.
Although the overall impact is expected to be limited, these institutions will benefit from lower systemic risk.
NBFIs may experience an increase of 40 to 60 basis points in bank funding costs. It is believed that banks pass on capital cost to NBFIs by higher risk weight on loans.
Larger NBFIs are in a better position to negotiate favorable terms with banks, while lower rated institutions may face higher increases.
Loans to housing finance companies and NBFIs eligible for priority sector classification have been excluded from the adjustment, which will benefit institutions like Shriram due to their priority sector exposure.
The regulatory changes aim to strike a balance between promoting consumer credit growth and preventing the build-up of systemic risks.
The phased implementation of these measures underlines the regulators’ commitment to maintain financial stability Whereas financial institutions have been given time to adopt the new norms.
As India’s financial landscape undergoes these adjustments, stakeholders are closely monitoring the impact on lending practices, risk management and overall economic resilience.
(TagstoTranslate)Business News(T)RBI Vigilance(T)RBI(T)Credit Growth(T)Financial Stability(T)Consumer Credit