New Consumer Credit Norms To Bolster India's Financial Stability Amidst Surging Loan Growth: Fitch

Reserve Bank of India (RBI) has implemented stringent measures to increase the credit risks in certain loan categories impacting both banks and non-bank financial institutions (NBFIs).

Fitch Ratings has provided its insights into the repercussions of these regulatory chnages on the financial sector.

The central focus of the regulatory changes is to make it mandatory for banks and NBFIs to allocate more capital against unsecured consumer credit.

Fitch Ratings is of the view that these changes are a credit-positive effort by regulatory authorities to control possible risks in consumer credit.

Notably, the rise of unsecured credit card loans and personal loans by banks witnessed an exponential rise of 29.9 per cent and 25.5 per cent year-on-year increase, respectively, in the first half of the fiscal year 2024 (FY24).

This increase in consumer credit has raised concerns, highlighting the need for preventive measures.

The increase in the exposure to unsecured consumer loans is considered a riskier credit category, signalling a greater risk appetite among banks and NBFIs.

The trend is related to the institutions seeking to protect their net interest margins (NIMs) amid tough competition for secured retail loans.

The regulatory changes have introduced higher risk weights for both banks and NBFIs. While risk weights for credit-card lending has increased to 125 per cent from 100 per cent, for NBFIs, banks maintain a higher 150 per cent.

Microfinance has been excluded from higher risk weights for NBFIs, distinguishing it from banks.

Fitch Ratings has estimated that the measures may lower the banking system's common equity Tier 1 (CET1) ratio by around 30 basis points(bps).

The impact may vary for Fitch-rated banks, ranging from 6 to 34 bps with a double-digit impact expected for banks like State Bank of India (SBI) and Canara Bank.

Private banks that have relatively better CET1 capitalisation, are expected to maintain reasonable capitalisation without much impact even after the changes.

The proposed measures may not significantly lower the capital scores of banks or standalone Viability Ratings (VRs), though SBI's VR headroom may narrow.

Fitch-rated NBFIs, including Muthoot Finance, Manappuram Finance, Shriram Finance and IIFL Finance may witness an impact on loan growth, future asset quality and capitalisation ratios.

However, the overall impact of the recent guidelines is expected to be limited, with these entities benefiting from reduced systemic risk.

There is a probability of NBFIs experiencing a rise in bank funding costs by 40 to 60 bps. This is based on the assumption, that banks pass on capital costs from higher risk weights on loans to NBFIs.

Larger NBFIs are better in better position to withstand favourable terms with banks, while lower-rated entities may face greater challenges.

Lending to the housing finance companies (HFCs) and NBFIs eligible for priority sector classification are excluded from these changes, which is going to benefit entities like Shriram due to their higher priority sector exposure.

The regulatory changes are aimed at striking a fine balance between fostering consumer credit growth and preventing the piling up of systemic risks.