The Reserve Bank of India’s (RBI) move to increase risk weights on unsecured consumer consumption personal loans and credit card receivables by 25% will constrain lenders’ loan growth in the segments, global rating agency Fitch said on Thursday.
The agency said it views the higher risk weight as a credit-positive move by the regulator to control emergent systemic risks posed by consumer credit which has increased rapidly in recent years off a relatively low base.
Growth in banks’ unsecured credit card loans and personal loans in the first half of the current financial year stood at 29.9% and 25.5% on a year-on-year basis, respectively, as against total banking system loan growth of 20% year-on-year during the same period. Non-banking finance companies have also shown similar growth trends, Fitch said.
“We believe increasing exposure to unsecured consumer credit — typically a riskier loan category — indicates greater risk appetite as banks and NBFIs seek to protect net interest margins (NIMs) amid stiff competition for secured retail loans,” the rating agency said.
According to Fitch, the RBI’s diktat may lower the banking system’s common equity Tier 1 (CET1) ratio by around 30 basis points (bps). Higher risk weights on banks’ loans to NBFCs, meanwhile, will be more significant, averaging at about 34 bps.
“Overall, we estimate the banking system’s CET1 ratio will fall by 60-70 bps from the impact of the changes,” it said. Further, NBFCs’ funding costs could rise by 40-60 bps and lead to “modest” NIM compression. However, larger NBFIs would be in a better position to negotiate favourable terms with banks, it said.
Meanwhile, domestic rating agency ICRA said the RBI’s circular would likely impact the NBFCs’ loan sell-downs of personal loan retail pools to banks, which had gained momentum in recent years.
“Given the regulator’s growing concern on the increase in personal loan disbursements, even the PTC (pass through certificate) transactions could be impacted temporarily if the banks decide to pause on investments in personal loan asset class to reassess the macro-environment,” it said.
Loan sell-down by way of direct assignment (DA) transactions by personal loan NBFCs amounted to about `1,150 crore in FY23 and had already crossed `800 crore in H1 FY24. On an overall level, however, the securitisation market will not see significant decline in transactions, it said. Accordingly, ICRA has maintained its estimate of `1.9-2 trillion of securitisation volumes in FY24 as compared to `1.8 trillion seen in FY23.