Post-RBI guidelines, be ready for costlier personal loans

Banks may slow down on retail lending activity

The foremost impact of the Reserve Bank of India increasing risk weightage for lenders and non-banking financial companies will be that one will have to pay more for the retail consumer loans, which are already costly when compared to other loans due to their being unsecured in nature.

Lenders are likely to increase interest rates on these products to offset the impact on profitability. The cost of borrowings for NBFCs will also go up as banks look to increase lending rates while higher risk weight leads to higher capital consumption.

Simply put, with the exception of home, automobile, education and gold loans, which don’t come under the purview of last week’s RBI diktat, the average individual customer will have to pay more interest for loans.

Analysts at Motilal Oswal see a 30-85 basis point impact on capital ratios of banks (barring SBI Cards) on account of the increase in risk weightage. However, strong profitability and healthy capitalisation levels across lenders will cushion the impact of this measure, they say.

The immediate impact of the enhanced risk weights is the excess capital that banks would now require to fund. As per SBI Economic Research, the banking industry needs Rs 84,000 crore of excess capital due to these regulatory measures.

Moreover, banks will see a 50-60 basis point haircut on Tier I capital adequacy ratio due to rise in risk weights on personal loans, credit card dues and loans to NBFCs. While the haircut will be higher for large private banks, it will be lower in case of Bandhan Bank and IndusInd Bank, says a report by Jefferies. 

The good thing is that most of the banks are well capitalised. Still, state-run lenders may have to advance capital raising cycle by a year or so. Banks may also look to raise rates on loans to NBFCs and tighten lending norms, which may impact earnings. S&P Ratings also sees a hit on Indian banks' capital adequacy by 60 basis points.

“By raising the risk weightage to loans to NBFCs, the money supply will get throttled. The change in risk weightage will result in higher capital requirements for banks. For banks to maintain risk adjusted returns the lending rates need to go up anywhere between 40 and 75 bps but the actual scenario will be market-driven,” Virat Diwanji, Group President and Head of Consumer Banking at Kotak Mahindra Bank told DH.

Thus, unsecured lending may slow down over next 3 – 6 months. This move will push lenders to go selective on credit in the unsecured space, he added.

Manish Agarwala of Phillip Capital said that risk weighted assets for the top banks are expected to increase by 2-4 per cent based on loan mix. There may be relatively higher impact for ICICI Bank given its’ large exposure to NBFCs and the unsecured segment. But the bank is well capitalized and the decline in capital levels due to change in risk weights will not dent their growth capability.

As per S&P Rating, new regulatory risk weights will hit Indian banks' capital adequacy by 60 basis points.

“Banks and NBFCs will now see much lower CARs. If a bank has 20 per cent CAR for personal loans (unsecured) or loan against fixed deposit or stocks, then it's lent Rs 100 for Rs 20 in capital. Now that Rs 100 will be counted as Rs 125 so the CAR falls to 16 per cent,”  said Anil Kumar Bhansali, Head, Treasury, Finrex.