Lenders take heat as RBI cracks whip

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, since markets had been expecting a rise in interest rates on unsecured loans, analysts believe much of the market impact played out on Friday and further declines, if any, would be limited.

Indices representing financial stocks, led by State Bank of India, Axis Bank, ICICI Bank and Bajaj Finance Ltd, fell. The Bank Nifty fell 1.3%, the most in more than two weeks, while the Finnifty, which includes 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 Bank of Canara also fell by 2.39%, the most in two weeks.

foreign brokerage CLSA said it estimates a direct impact of a 40-80 basis point (bps) reduction in tier I capital for banks and a 230-415 bps reduction for Bajaj and SBI Financial Cards and Payment Services. However, the banks are likely to remain well capitalized and should not need to raise additional capital, he 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 moderate the growth of unsecured loans to banks over the coming quarters. It may also impact the growth rates of fintech intermediaries such as Paytm, although we do not think the impact would be major,” the CLSA report said.

A report from Macquarie Capital Securities said that the new rules could reduce bank lending by around 200 bps.

RBL Bank, SBI Cards, and Aditya Birla Capital, which are not part of the Nifty, fell 5-8% as bears increased selling positions. Cholamandalam Finance fell 3.5%, while Shriram Finance lost 2.34%.

Stocks like RBL Bank, and SBI Cards may continue to come under pressure as their open interest or outstanding positions on their futures contracts rise. A rise in open interest combined with a fall in prices indicates bearish sentiment. Top brokers believe that the latest moves will impact NBFCs more than well-capitalized banks.

Calling it a “positive move” to ensure prudent growth in unsecured loans, SBI Cards said the move will reduce the company’s capital adequacy by around 4%. In a stock exchange disclosure, he said that the company is well capitalized, and if necessary. , will add to its tier-2 capital.

State Bank of India expects a minimal impact on its capital ratios, chairman Dinesh Khara told Reuters. The impact of the increased risk weighting 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 accelerate the fund. -rise.

“Capital requirements have not been tightened for car loans, home loans, gold loans; therefore, the core sectors responsible for growth in the economy are not involved,” Khara said, adding that he does not expect the central bank to tighten capital requirements for any of these segments.

Growth in some unsecured loans—loans not backed by collateral—has significantly outpaced overall credit growth. For example, credit card outstanding rose 30% year-on-year (yoy) in September, other personal loans grew 25% and consumer durables rose 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 go up anywhere between 40 and 75 bps, but the actual scenario will be market based. This move certainly affects lenders’ ROEs. In summary, this move is likely to fulfill the desired objective of prudent unsecured lending and this may slow the growth of unsecured loans in the next three to six months. This move will push lenders to go selectively for credit in the unsecured space,” said Diwanji.

Poonawalla Fincorp, a non-bank lender, said the impact on its consumer credit exposure could be around 220 bps.

“As a result, the resulting capital adequacy would be around 40%, still well above the regulatory requirement of 15%,” the company said in a press release. we do not expect any impact from the increased risk weights on our growth trajectory and profitability,” he said.

The RBI move came after several warnings to banks and NBFCs about a potential crisis in the unsecured loan segment. Banks have doubled this loan portfolio ₹6 trillion in FY19 to ₹13 trillion as on 30 September 2023. Outstanding credit card loans also rose by 144%. ₹2.2 trillion in the last four years. Bank credit to NBFCs also grew by 30% in the second quarter of FY24, compared to 14% in other bank loans.

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Updated: 18 November 2023, 12:03 AM IST