New regulatory risk weights will hit Indian banks’ capital adequacy by 60 bps: S&P Global

India’s central bank has increased risk weighting on unsecured personal loans, credit cards, and loans to non-banking financial companies (NBFCs) by 25 percentage points. Higher lending rates, lower credit growth, and an increased need to raise capital among weak borrowers are likely, he said. The reports indicate that higher risk weights will ultimately support asset quality.

“Slower loan growth and greater emphasis on risk management are likely to support asset quality in the Indian banking system,” said Geeta Chugh, credit analyst at S&P Global Ratings.

“However, the immediate effect 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 approximately 60 basis points. Financial companies will be affected more as their incremental bank borrowing costs increase, as well as the impact on capital adequacy,” she said.

These changes will not have any immediate effect on our ratings in the Indian financial sector. This will also not affect our risk-adjusted capital ratio for the rated banks and financial companies, according to the report.

“We apply globally consistent risk weights that reflect our view of risks across underlying asset classes. For unsecured personal loans from Indian banks and finance companies, we already have a higher risk weight of 121% in place,” Chugh said.

Unsecured personal loans and credit card debt in India have grown rapidly in recent years. Such loans grew by 26% in the 12 months ending September 2023. This type of loan, together with durable lending to consumers, accounted for about 9.8% of total loans in the banking system as of 22 September September, 2023, according to the report.

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Updated: 17 November 2023, 06:24 PM IST