RBI Clampdown On Lenders May Raise Their Cost of Capital, Says S&P Global
The funding cost for the system could rise and potentially lead to longer lending processes for the lenders.
The Reserve Bank of India's recent clampdown on financial companies and banks will curtail overexuberance and enhance compliance, but it also has some drawbacks, according to S&P Global Ratings.
The primary drawback would be the need for higher capital costs for these financial institutions.
This is because the action would drive these entities to focus more on policies and processes, ultimately enhancing the operational resilience of the system, S&P Global said.
The shift, however, would result in increased compliance costs and also curb the ability of smaller companies to compete in the market, it said.
The smaller companies may then need to rely more on originate and distribute models, co-lending and direct assignments, according to Geeta Chugh, credit analyst at S&P Global.
Recently, the regulatory body has shown its non-tolerance for non-compliance through actions against several companies. These include barring IIFL Finance Ltd. from disbursing gold loans, stopping JM Financial Ltd. from disbursing loans against shares, and barring Paytm Payments Bank from accepting further credits into its customer accounts and wallets after March 15.
S&P Global expects these clampdowns by the RBI to also have an impact on credit growth in fiscal 2025.
It expects loan growth to fall to 14% in fiscal 2025 from 16% in fiscal 2024, showing a cumulative impact of all actions.
Since the rules of the game are getting stricter, S&P Global also expects increased caution among fintechs and other regulated entities.
With the increased regulatory risk associated with investments, the rating agency expects investors to seek a higher premium for this. This is because the risk stems from the potential for tighter regulation, such as business embargoes.
"The risk premium that equity investors charge may increase, potentially affecting sector valuations," Chugh said. "We expect the funding cost for the system could rise and potentially lead to longer lending processes for lenders."
