RBI's Unsecured Loan Rules May Require Banks Rs 84,000 Cr Excess Capital

The banking sector may need an additional Rs 84,000 crore in excess capital, representing a five per cent increase over the existing Rs 15.2 lakh crore capital requirement, following the Reserve Bank of India's (RBI) decision to elevate the risk weight on banks' exposure to consumer credit, credit card receivables and non-banking finance companies (NBFCs). Experts foresee that this move could result in higher borrowing costs for consumers.

The immediate consequence of the augmented risk weights is the heightened capital requirement for banks, leading to an expected 55-60 basis point increase in the Capital to Risk-Weighted Assets Ratio (CRAR), according to Soumya Kanti Ghosh, Group Chief Economic Adviser at the State Bank of India.

The RBI's circular primarily impacts consumer loans but excludes housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery. Consumer credit, which had been growing at over 25 per cent since May 2022, is affected by this RBI move, accounting for around 9.8 per cent of the total outstanding loans (Rs 151.5 lakh crore) as of September 2023.

While the affected segment of personal loans constitutes only 31 per cent of the total personal loans (Rs 48.3 lakh crore), the recent regulatory measures can be considered countercyclical, aiming to stabilise the business cycle by regulating economic activity during booms and supporting it during downturns, as per SBI.

Karthik Srinivasan, Senior VP & Group Head of Financial Sector Ratings at ICRA Ltd, anticipates that these regulatory changes will lead to higher capital requirements for lenders, resulting in increased lending rates for borrowers. This could also impact corporate bonds through higher yields and widened credit spreads for non-banking financial institutions (NBFCs).

Suman Chowdhury, Chief Economist and Head of Research at Acuité Ratings & Research, believes that the higher capital requirements will likely moderate the growth of unsecured loans, addressing potential systemic risks. Additionally, there may be a substantial increase in interest rates on unsecured loans by banks and NBFCs, affecting the cost of borrowings for NBFCs, including fintechs, with a significant proportion of unsecured retail loans.

The SBI report suggests that the RBI's decision to raise risk weights signals a proactive approach to addressing potential financial stability risks, aligning with the trend towards an Expected Loss (EL) driven stress recognition system and the recent regulatory scrutiny on 15 Upper Layer NBFCs.