Lenders Bear Brunt as RBI Implements Stricter Regulations

The Reserve Bank of India (RBI) took action to rein in credit-fueled consumption, causing shares of financial companies to decline. Non-bank lenders with significant consumer credit portfolios were hit the hardest, while larger, well-capitalized banks experienced milder effects.

Impact on Financial Stocks

Following the RBI’s move to curb credit-fueled consumption, financial stocks faced a sell-off. State Bank of India, Axis Bank, ICICI Bank, and Bajaj Finance Ltd were among the worst hit. The Bank Nifty index dropped by 1.3%, the largest decline in over two weeks, while the Finnifty, which comprises non-banking financial companies (NBFCs) and insurers, tumbled 0.9%. The Nifty PSU Bank index, consisting of major public sector banks, fell 2.39%, also the steepest decline in two weeks.

Increased Capital Costs and Slowing Credit Growth

The central bank raised risk weights on unsecured loans and loans to NBFCs, compelling lenders to allocate more capital and limit such lending. While the market had anticipated an increase in interest rates on unsecured loans, analysts believe the majority of the market impact occurred on Friday and that any further declines would likely be limited.

Estimated Impact

Foreign brokerage CLSA estimates that banks may see a reduction of 40-80 basis points (bps) in tier-I capital, while Bajaj Finance and SBI Cards and Payment Services could experience a reduction of 230-415 bps. However, it is believed that banks are still adequately capitalized and unlikely to require additional capital.

Potential Slowdown in Loan Growth

Analysts predict that the new regulations could lead to a decline of approximately 200 basis points in the growth of bank loans. It is expected that there could be a moderation in unsecured loan growth for banks in the coming quarters. This regulation may also impact the growth rates of fintech intermediaries, although the extent of the impact is projected to be limited.

Stocks Under Pressure

RBL Bank, SBI Cards, Aditya Birla Capital, and Cholamandalam Finance saw significant declines, with bears further increasing their sell positions. Stocks like RBL Bank and SBI Cards may continue to face pressure, as open interest on their futures contracts rises. Top brokerages believe that NBFCs will be more affected by the new measures compared to well-capitalized banks.

Response from Lenders

SBI Cards stated that the new rules will reduce the company’s capital adequacy by approximately 4%. However, the company confirms it is well-capitalized and will augment its tier-2 capital if necessary. State Bank of India expects minimal impact on its capital ratios and does not foresee the need for additional fundraising.

Measures to Ensure Prudent Lending

Dinesh Khara, Chairman of State Bank of India, considers the regulation a “positive move” to ensure prudent growth in unsecured lending. He expects the increased risk weight on personal loans, including credit cards, to have an impact of 55-60 bps. Khara believes that core sectors responsible for economic growth, such as car loans, home loans, and gold loans, remain unaffected by the tightened capital requirements.

Growing Concerns in Unsecured Loans Segment

The RBI’s action follows multiple warnings to banks and NBFCs regarding a potential crisis in the unsecured loans segment. The loan portfolio in this category has more than doubled, reaching ₹13 trillion as of September 30, 2023, compared to ₹6 trillion in FY19. Credit card outstanding loans have also soared by 144% over the past four years, standing at ₹2.2 trillion. Bank credit to NBFCs has seen a growth of 30% in the second quarter of FY24, outpacing the 14% growth in other bank loans.

In conclusion, the RBI’s stricter regulations have had a significant impact on the Indian financial sector. While non-banking lenders and certain stocks have experienced declines, well-capitalized banks remained relatively resilient. The move is aimed at ensuring a more sustainable and prudent approach to unsecured lending, which may result in a slowdown in loan growth. As the market adjusts to the new measures, it is anticipated that lenders will become more selective in their unsecured lending practices.