Unsecured Loans Thrive Despite 30-100 bps Capital Risk Weight Impact On Banks

Approximately two months after the Reserve Bank of India implemented increased risk weights for specific segments of consumer credit, private banks have reported a capital impact ranging from 30 to 100 basis points due to higher capital allocation requirements for these loans. Surprisingly, this hasn't hindered the growth of retail credit, including unsecured retail, in the third quarter.

In Q3 FY24, among major banks, HDFC Bank experienced the most significant capital impact of 97 basis points, followed by ICICI Bank and Axis Bank with a capital hit of 70 basis points. IDFC First Bank and RBL Bank, both with substantial shares of unsecured retail credit, faced an impact of 100 basis points and around 70 basis points, respectively.

Despite these challenges, strong overall capital ratios and a preference for higher-yielding retail assets, coupled with subdued corporate credit growth and slower deposit accretion, have driven robust growth in the retail credit segment, including unsecured retail, during the reporting quarter.

During Q3 earnings calls, Kotak Bank's CFO Jaimin Bhatt noted that higher risk weights aren't seen as a hindrance to unsecured loan growth. Similarly, Federal Bank mentioned that it reviewed pricing on personal loans and made some adjustments.

Personal loans of private banks exhibited year-on-year growth ranging from 10 per cent to 86 per cent, with ICICI Bank, Kotak, and Axis Bank showing growth rates of 28-37 per cent, and smaller players like IndusInd and Federal at 57-86 per cent.

In November 2023, the central bank increased the risk weights on consumer credit by 25 per cent, primarily affecting unsecured loans, excluding housing, education, vehicle, and gold loans.

Banks have taken the capital hit in their stride, attributing Q3 growth to the fact that the circular was introduced halfway through the quarter. While there may be some moderation in retail credit going forward, banks anticipate limited impact due to their ability to increase lending rates by 15-30 basis points, a robust portfolio quality, and strong demand for personal loans and credit cards.

HDFC Bank's CFO Srinivasan Vaidyanathan emphasized a strong pipeline of pre-approved and high-quality customers, with a continued focus on margin accretive segments and an increasing share of retail loans.

ICICI Bank stated its comfort with the quality of the NBFC portfolio and taking steps to refine credit parameters while maintaining robustness. IndusInd Bank and RBL Bank downplayed risks, noting that unsecured loans constitute a small portion of their overall portfolio, with a majority going to existing and partner customers, ensuring good visibility on portfolio quality.

Most banks project consumer credit to continue growing at around 25-30 per cent for FY24 and FY25, outpacing overall loan growth of 18-20 per cent. However, a recent RBI paper highlighted that personal loans grew at a CAGR of 17 per cent in outstanding amounts and 15 per cent in borrower accounts between 2015 and 2023, comprising the largest category of bank credit.

The full impact of these measures may be felt over the next two quarters as banks adjust their unsecured lending strategies. Nonetheless, analysts predict minimal reduction in credit supply due to strong capital adequacy ratios, healthy risk-adjusted returns, and historically low NPA levels. Any potential slowdown is expected to be in small-ticket loans, with demand and supply for large-ticket personal loans continuing to rise.