NBFC growth to some extent could be affected and could drive demand for securitisation and co-lending; Sudden withdrawal of banks and NBFCs from the consumer loan market may also enhance delinquency risks in this category
Karthik Srinivasan, Senior Vice President & Group Head - Financial Sector Ratings, ICRA
FinTech BizNews Service
Mumbai, November 17, 2023: Karthik Srinivasan, Senior Vice President & Group Head - Financial Sector Ratings, ICRA, and Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research, share their analytical views on the latest RBI announcement towards consumer credit and bank credit to NBFCs.
"The increase in risk weights for consumer loans is in line with expectations, though an increase in risk weight for lending by banks to non-banks was unexpected. These announcements are expected to result in higher capital requirements for the lenders and hence an increase in lending rate for the borrowers. These higher lending rates by banks to non-banks could also spill over to corporate bonds by way of higher yields and widening of credit spreads for non-banks. Increase in risk weights for consumer credit loans is targeted towards NBFCs in the personal and consumption loan segments for augmenting their capital buffers. Entities operating in this space are well capitalized at present to meet this requirement. This however is expected to accelerate incremental capital raises by these entities to manage growth while ensuring that adequate buffers are maintained. Bank credit to NBFC, which are not eligible for priority sector classification, shall witness an increase in their cost of funds. This could affect NBFC growth to some extent and could drive demand for securitisation and co-lending."
Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research: "Given the increasing concerns voiced by RBI about the high growth in unsecured retail loans over the last few months, one would have expected that some regulatory tightening is on the way. From that perspective, the measures announced by RBI are not really surprising.
Essentially, these measures endeavour to address two concerns:
1. Excessive growth of unsecured consumer loans in the financial sector through a higher risk weight of 125% in the case of both banks and NBFCs; higher capital requirements is expected to moderate the growth of such loans
2. Spread of any such systemic risks in the banking sector through increased risk weight on lending to non-priority sector NBFCs (+25% for those with external rating at A and above)
Apart from a moderation in the aggregate growth of unsecured loans, the impact of the measures can be seen through the following:
1. A material increase in the rates charged on unsecured loans by banks and NBFCs
2. Higher cost of borrowings for large and small NBFCs (including FinTechs) with a high proportion of unsecured retail loans in their AUM
3. Increased focus of NBFCs on diversification of funding from banks and higher issuances in both public and private bond markets with attractive yields
4. Higher mobilization of capital by NBFCs into unsecured lending to cater to the additional capital requirements
5. Sudden withdrawal of banks and NBFCs from the consumer loan market may also enhance delinquency risks in this category
RBI has also urged the lenders to have an adequate risk management framework in place for unsecured retail loans with board-approved sectoral exposure limits and segmental limits, as applicable. This will go a long way in mitigating the systemic risks from any aggressive growth in unsecured loan exposures."
