S&P Global Report: RBI’s New Lending Norms to Impact Loan Growth and NBFCs

RBI's New Lending Norms to Impact

VoM News Desk | November 18, 2023 | 08:46 AM IST | Breaking News | Follow on Google News

S&P Global Report: RBI’s New Lending Norms to Impact Loan Growth and NBFCs

S&P Global Report: RBI’s New Lending Norms to Impact Loan Growth and NBFCs

S&P Global released a report analyzing the effects of the Reserve Bank of India’s recent measures to increase risk weights on certain types of lending, highlighting the potential impact on loan growth and the non-banking financial sector.

Key Findings of the Report

• Increased Risk Weights: The RBI has raised risk weights on unsecured personal loans, credit cards, and loans to non-bank finance companies (NBFCs) by 25 percentage points.
• Consequences for Lenders and Borrowers: This change is expected to lead to higher lending rates, slower loan growth, and a need for more capital among weaker lenders.
• Impact on Asset Quality: The report anticipates that these measures will support asset quality in the Indian banking system.

Immediate Effects on Banks and Finance Companies

• Tier-1 Capital Adequacy Decline: Banks are likely to see a decline of about 60 basis points in Tier-1 capital adequacy.
• Greater Impact on Finance Companies: NBFCs may face increased bank borrowing costs and a significant impact on their capital adequacy.
• No Immediate Effect on Sector Ratings: The changes will not immediately affect S&P’s ratings of the Indian financial sector or their risk-adjusted capital ratio for rated banks and finance companies.

S&P’s Risk Weights Application

• Consistent Global Risk Weights: S&P applies globally consistent risk weights reflecting its view on the risks associated with underlying asset classes.
• Already Higher Risk Weights for Unsecured Loans: For unsecured personal loans from Indian banks and finance companies, S&P already applies a higher risk weight of 121%.

Growth of Unsecured Personal Loans in India

• Rapid Rise in Recent Years: Unsecured personal loans and credit card debt have seen a rapid increase, growing by 26% in the 12 months ending September 2023.
• Significant Portion of Total Loans: These loans, along with consumer durable lending, represented about 9.8% of the total loans in the banking system as of September 22, 2023.

The RBI’s move is seen as a step towards ensuring prudent lending practices, particularly in the unsecured loan segment, which has witnessed significant growth. While it may lead to some challenges for lenders and borrowers in the short term, the long-term benefits are expected to be positive for the stability of the financial system.

VoM News Desk

VoM News is an online web portal in jammu Kashmir offers regional, National & global news.