The Reserve Bank of India's unexpected decision to raise the credit risk weights on personal loans by 25 per cent has sent shockwaves through banks and non-banking finance companies (NBFCs). This move poses challenges to deal with potential impacts on capital adequacy ratios, increased borrowing costs and constrained growth rates. SBI Cards, RBL and Bajaj Finance are expected to be among the most affected entities.
According to analysts, shadow banks are facing a double challenge – managing the blow to their capital ratios and coping with elevated borrowing costs as banks tighten credit lines. The RBI's decision, announced on Thursday, increased the risk weightage on unsecured consumer credit provided by commercial banks and NBFCs from 100 to 125 per cent.
Furthermore, the risk weight against credit card exposure was also raised by 25 per centage points to 150 and 125 per cent for banks and NBFCs, respectively. SBI Cards, being a significant credit card issuer with high exposure to unsecured credit, is estimated to face a decline in its Common Equity Tier-1 (CET1) capital level.
Analysts from Motilal Oswal predict a 30-85 basis points impact on capital ratios for affected entities, excluding SBI Cards. RBL, HDFC Bank and ICICI Bank are projected to experience the highest impact, with estimated reductions of 84 basis points, 72 basis points and 64 basis points, respectively.
Stock prices for impacted institutions saw significant declines in response to the RBI's decision. RBL Bank, particularly, experienced a 7.82 per cent drop, closing at Rs 234.70 on the BSE, while SBI Cards' stock fell 6.71 per cent to a day's low of Rs 720.40. These developments have raised concerns about the potential consequences for the affected financial entities and the broader financial sector.