“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.
The RBI increased risk weights on unsecured personal loans, credit cards, and lending to nonbank finance companies (NBFCs) by 25 percentage points on Thursday. S&P Global Ratings noted that this will hit Indian Banks‘ capital adequacy by 60 basis points or 0.6%.
In its report, S&P Global Ratings noted that the move will likely lead to higher lending rates, lower credit growth, and an increase in the need for capital raising among weak lenders.
“We estimate that the 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,” it noted, adding that this would lead to slower loan growth for lenders, reduced capital adequacy, and some hit on profits.
In its note, the rating agency stated that these changes won’t have any immediate effect on its Indian financial sector ratings. This will also not affect our risk-adjusted capital ratio for the rated banks and finance companies, it said, noting that
weaker finance companies may encounter disruptions to their funding access, which could push the entities to an originate-and-distribute business model.
Banks’ exposure to NBFCs is 7.4% of total loans. In many banks, this number is much higher, and, therefore, the effect on regulatory capital adequacy will be higher.
“NBFCs face a double-whammy of higher risk weights on their unsecured loans and on bank lending to NBFCs. This will squeeze the reported capital adequacy of nonbanks and push up their funding costs,” said S&P Global Ratings credit analyst Deepali Seth Chhabria, adding: “While NBFCs are not homogeneous, many retail-focused finance companies have a much higher exposure to unsecured loans than banks.”
As per the report, unsecured personal loans and credit card debt have risen rapidly in the past few years in India. Such loans have grown by 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, it noted.
The report further stated that underwriting standards for retail loans by larger players remain generally healthy. “Approval rates for new-to-credit customers across all retail loans in the April-June quarter have fallen to 23%, compared with 29% a year earlier. The levels reflect lenders’ caution and—to an extent—higher inquiries,” it said, adding that banks offer a large portion of these unsecured loans to their liability-side customers.
Small-ticket personal loans of less than Rs 50,000 are particularly at higher risk. Reported delinquencies (90-plus days past due) for this type of lending were 5.4% as of June 2023, according to Transunion Cibil, a credit bureau. While these small borrowers are often highly leveraged and may have other lending products, loans below Rs 50,000 comprise only 0.3% of total retail loans. Financial technology firms are more exposed to these loans, as around 80% of their personal loans are to this customer segment.