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 were anticipating a rise in interest rates on unsecured loans, analysts believe much of the market impact played out 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 over two weeks, while the Finnifty, which comprises NBFCs and insurers, tumbled 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.

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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 well-capitalized and should not need to raise additional capital, it said.

“The other direct impact would be an increase in the cost of borrowing for NBFCs (which is hard to quantify). We expect the indirect impact to be a moderation in unsecured loan growth for banks over the quarters to come. It could also impact the growth rates of fintech intermediaries like Paytm, although we do not think the impact would be large,” a CLSA report said.

A Macquarie Capital Securities report said bank loan growth could decline by about 200 bps because of the new rules.

RBL Bank, SBI Cards, and Aditya Birla Capital, which are not part of the Nifty, plunged 5-8% as bears topped up sell positions. Cholamandalam Finance fell 3.5%, while Shriram Finance shed 2.34%.

Stocks such as RBL Bank, and SBI Cards could face continued pressure with their open interest or outstanding positions on their futures contracts rising. A rise in open interest accompanied by a fall in prices signals bearish sentiment. Top brokerages believe NBFCs will be more impacted by the latest measures than banks which are well-capitalized.

While 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 required, will augment its tier-2 capital.

State Bank of India expects minimal impact on its capital ratios, chairman Dinesh Khara told Reuters. The impact of the increased risk weight on personal loans, including credit cards, will be 55-60 bps, he said, and added that even after accounting for the increased capital requirement, SBI has enough buffers and does not see the need to accelerate fund-raising.

“Capital requirements have not been tightened for car loans, home loans, gold loans; so, core sectors responsible for growth in the economy are untouched,” Khara said, and added 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—has outstripped total credit growth by a wide margin. For instance, credit card outstanding rose 30% year-on-year (y-o-y) in September, other personal loans grew 25% and consumer durable loans rose 11%. Overall bank credit growth was 20% in the same period, showed RBI data.

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 can go up anywhere between 40 and 75 bps, but the actual scenario will be market-driven. This move certainly has an impact on ROEs of lenders. In a nutshell, this move is likely to meet the desired objective of prudent unsecured lending and this can slow down the growth of unsecured lending over the next three to six months. This move will push lenders to go selective on 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 resultant 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 on immediate basis or in foreseeable future, we do not expect any impact of the increased risk weights on our growth trajectory and profitability,” it added.

The RBI move has come after several warnings to banks and NBFCs about a potential crisis in the unsecured loans segment. Banks have seen this loan portfolio more than doubled from ₹6 trillion in FY19 to ₹13 trillion as on 30 September 2023. Credit card outstanding loans, too, have jumped 144% to ₹2.2 trillion over the last four years. Bank credit to NBFCs has also seen a 30% growth in the second quarter of FY24, versus 14% in other bank loans.

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Updated: 18 Nov 2023, 12:03 AM IST