Impact of Increase in Risk Weights on Consumer Credit / Loans to NBFCs by Nirmal Bang

Private banks have adequate capital buffers to grow comfortably

Key Points

 As indicated earlier by the RBI with respect to its concern for high growth in certain components of consumer credit (mainly small ticket unsecured loans, which includes borrowers who have taken more than one loan at a time) and increased dependency of NBFCs on bank borrowings, the regulator has introduced the following measures to control any major asset quality risks that may arise for lenders in future – (1) Risk weights on consumer credit exposure (outstanding and new) of commercial banks, (which mainly includes personal loans and excludes housing loans, education loans, vehicle loans and gold loans) have been increased from 100% to 125%. (2) RWA on consumer credit of NBFCs (largely personal loans and excludes most secured assets/MFI loans) has been increased from 100% to 125%. (3) RWA on credit card exposures of banks/NBFCs increased from 125%/100% to 150%/125%. (4) RWA on bank loans to NBFCs to see 25% increase, in case of loans rated A and above where the RWAs are below 100% (5) Top up loans on movable assets to be treated as unsecured credit.

 Our View – While we expect banks to see some slowdown in growth in PL/Cards/NBFC segments, the impact will vary across lenders, depending on their capital position, exposure to consumer credit/NBFC segment and the credit filters that they have in place. As per our rough calculations on the impact of an increase in risk weights on personal loans and loans to NBFCs, we see a decline of 22-96bps in the CET-1 of 15 banks under our coverage. However, considering that most private banks have excess CET-1 capital ratio of 5.3-13.5% and have seen an improvement in asset quality, they may not need to raise equity capital immediately to fund their growth plans. In the case of PSU banks, where the capital buffers are relatively lower than private sector banks, the decrease in CET-1 is estimated at 45-74bps. The negative impact of these guidelines will be felt more in the NBFC/fintech space in the form of a slowdown in consumer credit growth and increased cost of funds due to expectation of the banks to cut down lending to the NBFC space, leading to the latter borrowing more from debt markets.