The hike in risk weights for consumer loans like personal loan and credit cards may shave-off tier I capital of banks by 60 basis points, hit loan growth, and squeeze the nonbank sector in particular, S&P Global Ratings said on Friday.
The Reserve Bank of India (RBI) 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, hit on profitability and the higher risk weights will ultimately support asset quality, the rating agency said in a statement.
S&P Global Ratings credit analyst Geeta Chugh said the finance companies will be worse affected as their incremental bank borrowing costs will surge, in addition to the capital adequacy impact.
“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,” the rating agency said.
“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 per cent”, it said.
Unsecured personal loans and credit card debt have risen rapidly in the past few years in India. Such loans have grown 26 per cent in the 12 months ending September 2023. This type of loan, along with consumer durable lending, represented about 9.8 per cent of total loans in the banking system as of September 22, 2023.
The lending poses a risk for incremental nonperforming loans (NPLs). The increase in risk weights by the RBI is a prudent step, it said.
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 was 5.4 per cent 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 per cent of total retail loans. Financial technology firms are more exposed to these loans, as around 80 per cent of their personal loans is to this customer segment.
Double-whammy for finance Cos
“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,” it said.
While NBFCs are not homogeneous, many retail-focused finance companies have a much higher exposure to unsecured loans than banks.
Bank borrowings remained the principal source of funding for NBFCs, constituting 41.2 per cent of the total borrowings of the entities (excluding core investment companies) as of March 31, 2023. The cost of the bank loans to NBFCs will rise incrementally, the rating agency said.
The overall blended funding costs of these companies will rise accordingly. Finance companies with a shorter duration of liabilities will see a quicker repricing of their liabilities, it added.