The Reserve Bank of India (RBI) announced in its latest November bulletin that it has increased the risk weights in respect of consumer credit exposure of commercial banks and non-banking finance companies (NBFCs) by 25 percentage points to 125 per cent.
The credit card receivables for banks will attract a risk weight of 150 per cent, while those by NBFCs will attract a risk weight of 125 per cent, compared to 125 per cent and 100 per cent previously. In order to moderate over reliance of NBFCs on bank borrowings, RBI has also increased risk weights on bank lending to NBFCs for certain categories.
Risk weights on bank lending to NBFCs are governed by external credit rating of the NBFC. RBI has decided to raise risk weight on bank lending to those NBFCs where risk weights are below 100 per cent, by 25 percentage points. However, loans to housing finance companies (HFCs), and loans to NBFCs which are eligible for classification as priority sector shall be excluded in this.
The central bank has increased the risk weight for consumer credit exposure, excluding housing, education, vehicle and gold-backed loans, to 125 per cent from 100 per cent earlier. ‘’The increase in the risk weights of consumer credit exposure of commercial banks (outstanding and new), includes personal loans, but excludes housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery,'' said RBI.
Analysts said that 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. From the perspective of macro financial stability this is a welcome decision, according to analysts.
Also Read: SBI Card, Bajaj Finance, HDFC Bank, other financials fall after RBI tightens consumer loan norms
‘’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,'' said Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
According to domestic brokerage firm JM Financials, the larger banks including HDFC Bank, ICICI Bank, Axis Bank, State Bank of India and Kotak Mahindra Bank seem to have potential overall impact of ~70-80 basis points (bps) on Common Equity Tier 1 (CET1) ratios. One basis point is equal to one hundredth of a percentage point. CET1 ratio compares a bank's capital against its risk-weighted assets to determine its ability to withstand financial distress.
Within the larger NBFCs in the brokerage's coverage Bajaj Finance has relatively higher impact given higher share of consumer credit in its asset mix. However, given the recent capital raise (Tier1 at ~22 per cent post capital raise and post risk weight changes), JM Financials does not expect substantial changes to overall return profile.
Amongst smaller NBFCs, Poonawalla Fincorp has an impact of ~230-250 bps on Tier1 given higher share of unsecured loans and fully retail asset portfolio. However given its high capital adequacy (42 per cent prior to risk weight changes), impact on business is likely to be minimal.
‘’With the move to raise risk weights on NBFC lending for banks, we expect cost of funds to inch up for most larger NBFCs (by 10-20 bps) given that most large NBFCs have risk weights of less than 100 per cent given their rating profile stands between A to AAA and banks will pass on higher capital charge to NBFCs,'' said JM Financials.
‘’We believe vehicle financiers, housing finance companies, gold loan financiers and NBFC MFIs are relatively well-placed with respect to to implications of this move by the regulator. Within this space, Shriram Finance, Home First Finance and NBFC-MFIs( Fusion Micro Finance) are preferred plays,'' it added.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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