Shares of banks and non-banking finance companies (NBFC) including Bajaj Finance, SBI Card, ICICI Bank, HDFC Bank, among others witnessed selling pressure on Friday after the Reserve Bank of India (RBI) tightened norms for personal loans and credit cards.
The Bank Nifty index dropped over 0.7%, while Nifty Financial Services declined over 0.6% in early trade on Friday with SBI Card shares falling the most over 6%.
The RBI on November 16 raised the risk weights for lenders and NBFCs by 25 percentage points to 125% on unsecured retail loans.
The central bank hiked the risk weights credit card exposures by 25 percentage points to 150% and 125% for banks and NBFCs, respectively. It has also asked the banks to set aside additional capital against loans to NBFCs, where the risk weight is currently below 100%.
Read here: RBI tightens norms for personal loans and credit cards, raises capital requirements
The new risk weight, or the capital that banks need to set aside for every loan, will apply to personal loans for banks and to retail loans for NBFCs, the RBI said. The housing, education and vehicle loans as well as loans secured by gold and gold jewellery will be excluded, added the RBI.
The new norms could have been prompted by the potential risk build-up in these categories after the robust growth witnessed in these segments post Covid.
Negative for banks, NBFCs
Analysts expect the new norms to make personal loans and credit cards costlier and may curb growth in these categories.
“This is negative for the entire sector as it takes away the growth multiple and would increase Cost of Funds (CoF) for NBFCs. Channel checks and the RBI’s FSR suggest that non-SBI PSU banks have high NPLs on unsecured loans even with small exposures,” said Nuvama Institutional Equities.
RBI’s decision is viewed as a measure to enhance the stability of the financial system and prepare for potential macroeconomic challenges in the future. It aligns with previous statements from the central bank regarding concerns over unsecured lending.
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“The circular is anticipated to result in a reduction of CRAR for banks, potentially accelerating the need for equity raising. Our analysis indicates that the impact of the increased risk weights will likely affect RoE rather than RoA for banks,” said Centrum Broking.
As per Axis Capital, the increase in risk weights will somewhat moderate the credit growth to these segments though it does not see any significant slowdown as long as credit costs remain low, and risk-adjusted returns in these segments remain healthy.
“We estimate CET1 for banks under our coverage to decline by 50-100 bps. Within NBFCs, we estimate SBI Cards to see maximum tier1 impact (~410 bps),” Axis Capital said.
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Most impacted banks
Analysts believe the entire banking sector to be impacted as it takes away the growth multiple. The most affected banks would be those with relatively low on capital or with high exposures.
State-owned banks other than SBI have high NPLs on unsecured loans. While their unsecured exposures are small, if high NPLs continue, they could remove 15-20 bps of recently improved RoA.
Nuvama Institutional Equities believes the most impacted banks are:
- Axis Bank due to rapid growth in unsecured, high share of NBFC, relatively low capital
- SBI due to low capital though NPLs are in control in unsecured loans
- Kotak Mahindra Bank on high CAR but large portion of incremental growth is driven by unsecured loan
- RBL Bank due to high credit cards’ share
- Bank of Baroda on high NBFC loans’ share
Even other banks are impacted but to a lower extent. ICICI Bank has high share of incremental loans from unsecured while HDFC Bank’s outstanding share is high though incrementally growth in unsecured has slowed in the last two, said the brokerage house.
Most impacted NBFCs
The brokerage believes the CoF for the entire NBFC sector will rise. NBFCs that are more impacted than others include SBI Cards on capital, Bajaj Finance on higher exposure to credit cards and consumer durables and Aditya Birla Capital, Poonawalla Fincorp and Cholamandalam Investment and Finance Company due to high growth.
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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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