New regulatory risk weights will hit Indian banks’ capital adequacy By 60 bps

The Indian central bank has increased risk weights on unsecured personal loans, credit cards, and lending to nonbank finance companies (NBFCs) by 25 percentage points. This will likely lead to higher lending rates, lower credit growth, and increase the need for capital raising among weak lenders, it said. The reports projects that higher risk weights will ultimately support asset quality.

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

“However, the immediate effect will likely be higher interest rates for borrowers, slower loan growth for lenders, reduced capital adequacy, and some hit on profits. We estimate that Tier-1 capital adequacy of banks will decline by about 60 basis points. Finance companies will be worse affected as their incremental bank borrowing costs will surge, in addition to the capital adequacy impact,” she added.

These changes won’t have any immediate effect 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 on risks on underlying asset classes. For unsecured personal loans of 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 the past few years in India. Such loans have grown 26% in the 12 months ending September 2023. This type of loan, along with consumer durable lending, represented about 9.8% of total loans in the banking system as of Sept. 22, 2023, as per the report.

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Updated: 17 Nov 2023, 06:24 PM IST