RBI's consumer loan action is credit positive: Moody's

Lenders’ need to allocate higher capital on unsecured personal loans, following the Reserve Bank of India‘s decision, will improve their loss-absorbing buffers and will turn out to be credit-positive, Moody’s Investors Service said in a note on Monday.

Analysts have flagged the rapid growth of unsecured loans recently, with RBI Governor Shaktikanta Das calling for better surveillance. Moody’s said that this growth exposes financial institutions to a potential spike in credit costs in case of sudden economic or interest rate shocks.

RBI recently hiked risk weights on unsecured retail loans, credit cards and lending to non-banking finance companies (NBFCs) by 25 percentage points. Financial stocks took a beating the following trading session.

SBI Cards & Payments Services fell 5% on the worst day in over a year, while bank Bajaj Finance, the country’s largest shadow lender, fell 1.9% as investors assessed the growth prospects for financial services companies, the most influential segment of India’s $3.7 trillion stock market.

“The tightening of underwriting norms through higher risk-weighted assets is credit positive because lenders will need to allocate higher capitals for such loans improving their loss-absorbing buffers and may dampen their growth appetite,” Moody’s said.

It stated that banks, non-bank financial businesses (NBFCs), and financial technology (fintech) firms—including a number of recent entrants—have been rapidly expanding loans in the unsecured lending category in India over the past few years, making the market extremely competitive.According to Moody’s, over the last two years, the average increase in personal loans was roughly 24 per cent, while average growth in credit card loans was 28 per cent. In contrast, the overall growth in credit for the banking sector was about 15 per cent. “We expect banks would be able to absorb higher risk weights on their capital because the overall banking sector’s exposure to unsecured retail credit is small at around 10 per cent of loans as of September 2023 and the sector’s overall capitalization is at historically high levels with a Common Equity Tier 1 ratio of 13.9 per cent as of March 2023,” Moody’s said.

However, the impact of the new underwriting rules could vary among individual lenders depending on their exposure to unsecured loans, it added.

Last week, US-based S&P Global Ratings had said that the RBI’s decision to tighten norms for unsecured consumer credit is likely to hit banks’ capital adequacy by 60 basis points.

The move could lead to higher lending rates, lower credit growth and increase the need for capital raising among weak lenders, it added.

“The final rules are far more draconian in our view,” said Suresh Ganapathy, head of financial services research at Macquarie Capital. Non-bank lenders will bear the brunt of RBI’s move as their funding cost will increase, he added.

Banks will have to increase the risk cover on some consumer loans, credit card receivables and bank credit to shadow lenders by 25 percentage points. The decision excludes mortgages, loans for education and cars, and debt backed by gold. Tier-1 capital adequacy of banks will decline by about 60 basis points, S&P Global Ratings said in a statement.

The increase in risk-weight of loans taken from banks may nudge non-bank lenders to seek alternative sources of credit, analysts said.

(With agency inputs)


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