RBI norms set to make retail loans costlier

The immediate impact of the RBI action to increase the risk weight on certain categories of unsecured loans, loans to NBFCs and credit card loans is that this will increase the capital requirements of banks, which in turn will increase their cost of capital - Dr VK Vijayakumar, chief investment strategist, Geojit Financial Services, tells Bizz Buzz

Comes With A Rider

• RBI’s move will affect all consumer credit other than housing, auto, gold, edu and MFI loans
• Growth in unsecured retail loans and loans to NBFCs at 2yr CAGR of 24% /26% respectively
• Asset quality trends have so far been holding up

Mumbai: The Reserve Bank of India (RBI) has recently increased the risk weightage to all consumer retail loans by 25 per cent. This will have a major impact on the credit card issuers like SBI, ICICI Bank and NBFCs like Bajaj Finance whose major part of business comes from consumer retail loan segment.

However, RBI move comes with a rider as it will make raising funds by the lenders/NBFCs costlier in future. As consequence, retail loans will turn costlier, leading to fall in credit offtake in this segment.

Post the RBI move, all consumer credit (other than housing, vehicle, gold, edu and MFI loans) saw an increase in risk weight to 125 per cent from 100 per cent. In effect, if a bank has 20 per cent capital adequacy ratio (CAR) for personal loans (unsecured) or loan against FD/stocks, then it’s assumed that the bank has sanctioned Rs100 loan against Rs20 capital (it’s lent Rs100 for Rs20 in capital.)

Now that Rs100 will be counted as Rs125 (125 per cent risk weight) so the CAR falls to 16 per cent.

Retail loan segments that are unimpacted are housing loans, auto loans, education loans, gold loans and KCC loans. Moreover, loans explicitly classified as MSME loans would be unimpacted even if they satisfy the RBI definition of retail loans i.e. have ticket size less than Rs50 million. Also, microfinance loans would be largely unimpacted since most of these loans are disbursed for business purposes. However, any microfinance loan made for consumption purposes would be impacted.

Talking to Bizz Buzz, Dr VK Vijayakumar, Chief Investment Strategist,Geojit Financial Services, says, “the immediate impact of the RBI action to increase the risk weight on certain categories of unsecured loans, loans to NBFCs and credit card loans is that this will increase the capital requirements of banks, which, in turn, will increase their cost of capital. Since the credit demand in segments like unsecured retail loans is robust, banks can easily pass on the increased cost to borrowers.”

So, there will be a marginal increase in the cost of credit to borrowers. The impact on banks’ profitability will be negligible and from the perspective of macro financial stability, this is a welcome decision, he said.

Growth in unsecured retail loans and loans to NBFCs have exhibited a two-year CAGR of 24 per cent/26 per cent respectively against sector loan CAGR of 16 per cent over the same period. This pace of growth could have prompted the changes in risk weight by the central bank as a prudent measure while asset quality trends have so far been holding up.

Shibani Kurian,Senior Executive Vice-President &Head (Equity Research), Kotak Mutual Fund, says: “On a prima facie basis, the banking system would have to evaluate capital requirement as per the new risk weights Vs growth dynamics even while many banks especially the large private sector banks are well capitalised.”

Higher capital requirement for banks for NBFC lending may lead to higher cost of borrowing for NBFCs if passed on by the banking sector. The impact of the regulations would of course differ from entity to entity and be become clearer subsequently.

Shivaji Thapliyal, Head (Research) and lead analyst, Yes Securities, says: “The aforementioned rise in risk weights for specified loan segments will lead to greater capital requirement for banks depending on the quantum of the said exposures and cause banks to re-assess their growth patterns in the specified loan segments with a potential to pull back growth in these segments, likely on a moderate basis.”

Analysts believe that underwriting standards for retail loans by larger players remain generally healthy. Approval rates for new-to-credit customers across all retail loans in April-June quarter have fallen to 23 per cent, compared with 29 per cent a year earlier. The levels reflect lenders’ caution and--to an extent--higher inquiries.