Quality lenders to benefit from RBI’s credit shakeout: Saurabh Mukherjea

Saurabh Mukherjea's Team Marcellus has explained that the RBI's decision to increase risk weights in unsecured credit and NBFC credit from 100% to 125% is with a view to curb systemic risk posed by the sharp growth in the banking system. The effect of this move is that lenders have to set aside more equity capital for these credit risks.

The impact of this move will be more pronounced on the business models of ‘fintechs’ with large unsecured books & will lead them to curb excessive risk taking on unsecured loans.

However. quality lenders like Bajaj Finance, Kotak Bank, HDFC Bank, Chola etc have strength of their operations and are likely to see negligible business impact due to this change; in fact, these lenders are likely to benefit from this shakeout.



Team Marcellus has pointed out that Bajaj Finance and Chola have already raised equity capital, which should nullify the impact of increased risk weights and will lead to NIL impact on business growth, return ratios and growth plans. The other 2 HFCs are in secured businesses and hence, should not see any material business impact.

The most adverse impact from the RBI notification is likely to be felt by lenders with outsized exposure to unsecured lending/loans to NBFCs and/or high leverage on the balance sheet. For instance, the so called ‘Fintech’ companies which wanted to become lenders would likely face two-pronged impact from the increase in risk weight:



Due to inherent asset risks, many of the Fintech firms are not rated highly by the credit rating agencies. Thus, whatever credit they used to get from banks will get more expensive after the increase in risk weights for banks loans to NBFCs. The increase in cost of funds is likely to substantially reduce their ability to compete in the market vs. high quality NBFCs.

PSU Banks

It is stated that PSU banks which have historically relied more on high leverage rather than high RoAs to post decent RoEs would likely face a conundrum between raising funds and equity dilution to chase growth or tone down growth aspiration to preserve capital.
Team Marcellus has concluded that the competitive intensity in the consumer lending space is expected to tone down in the coming months allowing the prudent lenders with leeway on leverage to aggressively pursue higher market share. Combined with their historically low valuations, the current scenario presents a situation with asymmetrical payoff for investors.