In a major development for the NBFC sector, the Reserve Bank of India (RBI) directed to increase the risk weight on loan exposure to 125%. Earlier, it attracted a risk weight of 100%.
On a review, it has been decided that the consumer credit exposure of NBFCs – outstanding as well as new – categorised as retail loans, excluding housing loans, educational loans, vehicle loans, loans against gold jewellery and microfinance/SHG loans, shall attract a risk weight of 125%, the central bank said in a circular released on Thursday.
Also, the apex bank has increased the risk weight on NBFCs’ credit card receivables to 125% from earlier 100%. While that for the SCBs 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.
It is worth highlighting that high growth in consumer credit and increasing dependency of NBFCs on bank borrowings were also highlighted by Governor in the interactions with MD/CEOs of major banks and large NBFCs in July and August 2023.
With this move of RBI, loans from NBFCs are likely to get more expensive for borrowers. Increase in the risk weights for lenders directly impacts their capital adequacy ratio, as they have to set aside higher capital against such loans eventually making the loans more expensive for borrowers.
Risk weights of bank credit to NBFCs hiked
Another key announcement that the RBI has made in terms of credit exposure is to increase the risk weights on exposures of SCBs to NBFCs by 25% points, over and above the risk weight associated with the given external rating, in all cases where the extant risk weight as per external rating of NBFCs is below 100%.
It is to be noted that the exposures of SCBs to NBFCs, excluding core investment companies, are risk weighted as per the ratings assigned by accredited external credit assessment institutions (ECAI).
RBI has highlighted that the REs shall review their extant sectoral exposure limits for consumer credit and put in place, if not already there, Board approved limits in respect of various sub-segments under consumer credit as may be considered necessary by the Boards as part of prudent risk management.
Limits shall be prescribed for all unsecured consumer credit exposures. The limits so fixed shall be strictly adhered to and monitored on an ongoing basis by the Risk Management Committee.
All top-up loans extended by REs against movable assets which are inherently depreciating in nature, such as vehicles, shall be treated as unsecured loans for credit appraisal, prudential limits and exposure purposes.
Dual impact on NBFCs
Its a step in the right direction to curb the high growth in unsecured personal loans and credit cards. However, 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, said Gurjot Singh, Co-founder, Collekto.
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 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.
