RBI's New Credit Risk Weights To Hit Banks' Capital Adequacy, Says S&P

The Reserve Bank of India's revision of credit risk weights will hamper the loan growth of lenders, especially non-banking financial companies, according to S&P Global Ratings.

"Slower loan growth and an increased emphasis on risk management will likely support asset quality in the Indian banking system," Geeta Chugh, credit analyst at S&P Global, said in a report on Friday.

While these changes are not likely to have any immediate impact on the risk-adjusted capital ratios of banks and NBFCs, the interest rates for borrowers are expected to edge higher on an immediate basis, along with a drawdown in capital adequacy and some hit on profit, according to Chugh.

On Thursday, the RBI increased risk weights on unsecured personal loans, credit cards and lending to NBFCs by 25 percentage points to 125% with immediate effect. This implies that entities will have to lend at higher rates and raise more capital.

S&P Global estimates that the banks' core, or tier-1, capital adequacy will decline by about 60 basis points. "Finance companies will be worse affected as their incremental bank borrowing costs will surge in addition to the capital adequacy impact," the financial services firm said.

The "prudent" move by the RBI comes a little over a month after Governor Shaktikanta Das warned the banking system of high stress in unsecured lending portfolios and a possibility of higher delinquencies in the segment, the report said. Apart from banks and NBFCs, financial technology firms are more exposed to these loans, considering around 80% of their personal loans are unsecured, according to S&P Global.

Larger banks may be able to fend off the risks emanating from the increase in credit risk weights due to strong capital buffers and balanced exposure to unsecured portfolios, it said.

Banks' borrowings, which are a major source of funding for the NBFCs, constitute 41.2% of the total borrowings of the entities as of March 31. The increase in credit risk weight will push the cost of borrowings higher and, in turn, make lending costlier, it said. "The cost of the bank loans to NBFCs will rise incrementally, in our view."

"The overall blended funding costs of these companies will rise accordingly… NBFCs will likely largely be able to pass on these costs to the borrowers. If they are unable to fully pass on the increased costs to their borrowers, they will take a profit hit," it said.