Non-banking finance companies (NBFC) leaders see a potential moderation in unsecured lending after the RBI raised risk weights, but are optimistic about the overall health of the industry with shifting consumer behaviour and the rise of online lending platforms being pivotal determinants.
At an ETBFSI panel discussion on unsecured lending, industry leaders agreed on the need for a prudent slowdown, recognising the regulator’s pivotal role in shaping the trajectory of the industry.
Jairam Sridharan, MD&CEO, Piramal Housing Finance Ltd said the discernible slowdown in unsecured lending was due to signals from the Reserve Bank of India (RBI), which wants banks to go slow on lending to NBFCs and reduce interconnectedness.
“Everybody has a lot of equity and capital adequacy is extremely high, but the very point of what RBI is trying to do is to reduce growth, and if they don’t see the drone reducing, they will do something else. They will keep at it till they see some action,” he said.
Emphasising the importance of stakeholder alignment in response to regulatory cues, he stressed the need for collaborative efforts to ensure a robust and compliant lending environment.
He said if the rates increase, the industry knows other ways to grow the business and can do it. “However, as an industry, we need to recognise that the regulator is giving us a very clear indication of what they want as an outcome, if all of us suggest that no, nothing will change in our behaviour and we will continue to do exactly what we were doing before and deliver the exact same level of growth, then we should be ready for even more action.”
The RBI is certainly going to feel the heat of how much lending has happened and how much credit fueled growth is actually taking place in the country. And if we put ourselves in their shoes, we would certainly be worried.
The impact
Y S Chakravarti, MD & CEO, Shriram Finance, said there will be an impact of the RBI move on the price, particularly for NBFCs that have a lot of unsecured lending. He said the banking sector is evaluating the impact of heightened risk weights on loans to NBFCs. Highlighting the nuanced approach to risk evaluation and response to the evolving regulatory landscape, he provided a realistic perspective on managing liquidity challenges while keeping lending activities in motion.
Rakesh Singh, MD&CEO, Aditya Birla Finance Ltd saw a reduction in margins due to the RBI move. “In certain segments, which is unsecured business and all people are being more cautious. And that might see some moderation in terms of margins,” he said.
Singh elucidated the imperative of diversifying liabilities, aligning with the recommendations set forth by the RBI.
“Post COVID a lot of small-ticket unsecured loans have grown. And also because fintechs have really reached out to seek further in terms of unit economics. Earlier if you are in a bank or a lending company, and if you want to deliver a Rs 20,000 loan, the cost of delivery itself will not make it viable. But with online journeys and completely simple paperless journeys, you can do it.”
Singh elucidated the imperative of diversifying liabilities, aligning with the recommendations set forth by the RBI.
Diversifying liabilities
“We should look at diversifying the liabilities. And that’s what RBI has been saying to NBFC in terms of reducing the dependence on the banking system,” Singh said.
He expounded on the strategic shift towards Non-Convertible Debentures (NCDs) and public entities, positioning these endeavours as proactive measures to reduce dependence on traditional banking systems. Singh also delved into broader market dynamics and the industry’s focus on sustaining healthy growth rates amid evolving challenges.
Sarosh Amaira, MD, Tata Capital Housing Finance, provided insights into the impact of regulatory mandates on different asset classes within NBFCs. Acknowledging the varying impacts across sectors, he emphasised the resilience of companies with a diversified product suite. Companies offering a spectrum of financial products, including business loans, home loans, mortgages, and vehicle financing, were noted to be better positioned to navigate the regulatory landscape.
Krishnan Sitaraman, Senior Director, Deputy Chief Ratings Officer, CRISIL Ratings, anticipated a healthy growth rate of 14-17% in this fiscal for NBFCs. Delving into the impact of increased risk weights and changing exposure limits on the industry’s growth trajectory, he underscored the need for qualitative reassessment in line with evolving regulatory guidelines.
“If I look at the last five to six years, it will still be among the highest so that is still a healthy level of growth. And most of the decline or moderation will come from the unsecured category. In FY23 there was a 45% growth in AUM in the unsecured category, we are bringing that estimation down to 20 to 30%.”
