The Reserve Bank of India (RBI) recently issued an order that has significant implications for the banking sector. This order pertains to unsecured loans, such as personal loans and credit card loans. The RBI has increased the risk weight on these loans from 100% to 125%. This move is expected to impact the growth of the banking sector in the short term, with analysts warning that banks may slow down on aggressive retail lending.
Impact on Non-Banking Financial Companies (NBFCs)
The cost of funds for non-banking financial companies (NBFCs) is expected to increase as banks will pass on the excess burden on the cost of capital to NBFCs. Emkay Global Financial Services believes that the impact of RBI's actions will be mainly on growth due to increasing reliance on unsecured retail loans and lending to NBFCs.
Changes in Risk Weight
On Thursday, RBI increased the risk weight on unsecured loans like personal loans and credit card loans from 100% to 125%. The risk weight of bank loans to higher-rated NBFCs has also been increased by 25%. These new rules have come into effect immediately and will apply to both new loans and outstanding loans.
Impact on Banks
The increase in risk weighting means that banks will have to set aside more capital to give such loans. In return, the lender can increase the lending rates on such loans. This has led to a fall in the shares of several banks and financial institutions. For instance, RBL shares fell 7.7%, while SBI Cards and Payment Services fell 5%.
Who is Hurt the Most?
Between March 2020 and September 2023, unsecured loans have grown at a compound annual growth rate of 18.1%, while loans to NBFCs have grown at a compound annual growth rate of 12.1%. With the new guidelines coming in, analysts believe that lenders with relatively less capital or more unsecured loans/lending to NBFCs will be more impacted.
Conclusion
The RBI's new order on unsecured loans is a significant development for the banking sector. While it is expected to impact the growth of the sector in the short term, it is also seen as a move to ensure the stability of the financial system. As the situation unfolds, it will be interesting to see how banks and NBFCs adapt to these changes.
Please note that this blog post is based on the latest available information and may not reflect the most recent developments. Always consult with a financial advisor or do your own research before making any financial decisions.
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