RBI’s Stricter Norms For Consumer Credit To Impact Banks’ Capital Adequacy By 60 Basis Points: S&P Global Ratings

The banking regulator on Thursday assigned increased risk weights on unsecured personal loans, credit cards, and lending to nonbank finance companies (NBFCs) by 25 percentage points.

The Reserve Bank of India’s decision to enforce stricter rules for consumer credit by increasing risk weight for unsecured personal loans is expected to affect banks’ capital adequacy by 60 basis points, S&P Global Ratings said on Friday. 

The rating agency further said that the decision will help control riskier bank lending to consumers and is estimated to squeeze the nonbanking sector specifically, reported PTI. The banking regulator on Thursday assigned increased risk weights on unsecured personal loans, credit cards, and lending to nonbank finance companies (NBFCs) by 25 percentage points. 

S&P Global Ratings noted that this decision will result in an increase in lending rates, reduce credit growth, and raise the need for capital raising among weak lenders. The agency further said that the elevated risk weights will eventually support asset quality. It added that reduced loan growth and more emphasis on risk management will help support asset quality in the Indian banking system.

Geeta Chugh, the credit analyst for S&P Global Ratings, said, “However, the immediate effect will likely be higher interest rates for borrowers, slower loan growth for lenders reduced capital adequacy, and some hit on profits. 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.”

These changes will not immediately impact the financial sector ratings in India and they will also not affect the risk-adjusted capital ratio for the rated banks and finance companies, the agency added. 

Data from the credit bureau, Transunion Cibil, revealed that unsecured personal loans and credit card debt have increased rapidly over the last few years. These loans, along with consumer durable lending, contributed to about 9.8 per cent of the overall loans in the banking sector, as of September 22, 2023. 

The data showed that small-ticket personal loans of less than Rs 50,000 remained at higher risk. Reported delinquencies, which means over 90 days past due, for this segment of loans stood at 5.4 per cent, as of June 2023. 

The agency stated that financial technology firms are much more exposed to these loans, as they count 80 per cent of their personal loans in this segment. On the other hand, for credit cards and unsecured personal loans, the delinquency rate stood at 1.6 per cent, and 0.8 per cent respectively, as of June 30, 2023.