The Reserve Bank of India (RBI) directed NBFCs to increase the risk weight on loan exposure to 125% from its earlier 100% while the risk weight on NBFCs’ credit card receivables to 125% from earlier 100%. While that for the SCBs, it increased to 150% from earlier 125%.
In its circular RBI referred to Governor statement on October 6 where he flagged the high growth in certain components of consumer credit and advised banks and NBFCs to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards, in their own interest.
Also Read: RBI increases risk weight on consumer credit, bank credit to NBFCs
Poonawalla Fincorp in its regulatory filing has stated that the increase in the risk weight from 100% to 125% on the Company’s consumer credit exposure shall be marginal and is expected to be around 220 bps. With this the resultant capital adequacy would become ~ 40%, still significantly higher than the regulatory requirement of 15%.
“As per our long-term plans also, we do not expect our debt equity to go beyond 4x. 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 said.
Taking it to social media platform LinkedIn, Anagha Deodhar, Senior Economist at ICICI Bank said RBI’s decision was long overdue. In the last MPC, there were expectations that the central bank might hike risk weights on personal loans, credit cards and other categories of unsecured loans which have been recording high growth.
“Currently, banks’ services credit portfolio is INR 40 trillion. Out of this, NBFCs account for INR 14 trillion or 35%. During Apr 2022 to Sep 2023 (a period marked by double-digit growth in services credit), total services loan book grew 20% YoY while credit to NBFCs grew at a much faster rate of 27%. Since NBFCs account for over a third of services credit, this segment alone accounted for half of the services credit growth during the aforementioned period. Moreover, the latest Monetary Policy Report shows that within NBFCs, HFC’s credit growth is falling while that of non-HFC NBFCs is accelerating,” she said.
Given the profile of borrowers and higher lending rates, shadow banks and unsecured loans are particularly vulnerable to tighter financial conditions. The RBI’s off-policy decision to hike risk weights on these categories shows that the central bank is mindful of maintaining financial stability, she added.
Speaking on the development, Gurjot Singh, Co-founder, Collekto said, “The increase in risk weights will affect the capital adequacy ratio of lenders, thereby making them set aside more capital for such loans. Majority of the online lending apps procure capital from other NBFCs or Banks.”
“NBFCs whose capital mix is skewed towards bank borrowings will suffer a dual impact. One – they will have to set aside additional capital for lending in the unsecured category and secondly, the banks who are lending to them also have to set aside additional capital, thus leading to higher cost of capital. Since majority of online lending apps cater to consumer loans, the overall demand for such loans might go down as they are non-essential in nature. For the existing loans, the ROI (Rate of interest) will increase and will affect the creditworthiness of the borrowers who are at the higher end of debt-to-income ratio.”
Delinquency numbers for unsecured loans below Rs.50,000 was already at 5.4%. The significant rise in delinquencies in unsecured retail segment has led the regulator to take measures to create a stable environment for Indian economy as compared to its counterparts. This would go higher as the number of borrowers who default increase and at the same time fresh lending rate goes down, he added.
Jyoti Prakash Gadia, Managing Director at Resurgent India said, “these unsecured consumer loans are carrying higher risk of default, creating a possible overhang of potential NPAs .The RBI has rightly taken a cautious step to increase the risk provision requirement by 25 %. This is likely to act as a deterrent on unbridled growth of unsecured loans and make such loans costlier for consumers as also overall supply will get reduced. A timely step in the right direction at this juncture.”
