The Reserve Bank of India (RBI) has issued a directive for banks to set aside more capital for consumer loans, sparking concerns about the impact on major banks such as SBI Cards, HDFC Bank, and ICICI Bank. This move is expected to significantly affect the capital buffers of these banks, leading to pressure on their shares in the market.
Analysts predict that the new regulation will have the most significant impact on these banks, affecting their capital ratios 30-85 basis points. Capital buffers will need to be further strengthened if banks wish to continue lending to consumers for unsecured loans. The CET 1 capital, which is the highest quality of regulatory capital and the first line of defense against bad loans for banks, will be most impacted the new directive.
Motilal Oswal Financial Services anticipates RBL Bank, HDFC Bank, and ICICI Bank to be the most affected, with the highest impact on their capital ratios. Meanwhile, SBI Cards faces a 416bp impact on its capital ratios.
The surge in unsecured personal loans to retail borrowers in recent years has raised concerns. Borrowers with more than five personal loans rose from 1% in 2018 to 7.7% in March 2023, according to proprietary research UBS. The increase in lending to weaker credit profiles has become a cause for worry, with some non-banking financial entities facing scrutiny from the central bank for not adhering to norms.
Analysts warn that the pressure on net interest margins and higher credit costs will likely affect the earnings of banks and non-banking financial companies over the next few years. Paytm, a fintech company that has recently built a large loan portfolio primarily consisting of personal loans, stands to be impacted the RBI’s crackdown on these loans as well.
The implications for SBI Cards were elaborated Capital Mind CEO, Deepak Shenoy, who explained the need for increased capital and dilution if the organization wants to grow and maintain a high capital adequacy ratio.
The RBI’s recent measure to address personal loan disbursements signals a new focus on curbing risks to the financial sector, representing a significant shift in the lending landscape.