RBI tightens norms on personal loans for banks and NBFCs; stocks to be under pressure

• Three banks would be most impacted by the move as their capital ratios would be affected by 30-85 basis points.
• Capital buffers will have to be further strengthened by banks if they want to lend to consumers for unsecured loans.
• Borrowers with more than five personal loans rose from 1% in 2018 to 7.7% in March 2023, as per a report.

Shares of SBI Cards, RBL Bank, HDFC Bank and ICICI Bank are expected to come under pressure after the Reserve Bank of India asked lenders on Thursday to set aside more capital for consumer loans. This move is expected to impact the capital buffers of these banks.

According to analysts, these banks would be most impacted by the move as their capital ratios would be affected by 30-85 basis points. For banks the first line of defense against bad loans is CET Tier 1 capital or Common Equity Tier 1 capital (CET1), which is the highest quality of regulatory capital, as it absorbs losses immediately when they occur.

According to Motilal Oswal Financial Services, the CET 1 impact would be maximum for RBL/HDFC Bank/ICICI Bank at 84 basis points/72 basis points/64 basis points. Among non banks, SBI Cards would be the most vulnerable with a 416bp impact on capital ratios.

Capital buffers will have to be further strengthened by banks if they want to lend to consumers for unsecured loans. If a bank had to set aside say ₹20 for loans, it will now have to set aside 25% more for every unsecured loan it issues. Not just this the banks will have to set aside more capital if they want to lend to shadow banks or non banking financial institutions as well. When cost of capital increases, so will lending rates.

In the years after the pandemic broke, unsecured personal loans to retail borrowers have been on a steady rise. Not just banks but even non banks have been merrily issuing such loans to borrowers, and in many cases these borrowers have multiple such loans used for consumption. From 12-14% these loans are now growing at 30% rate. The central bank has cracked down on some non banks for not adhering to norms while underwriting such small ticket loans.

The red flags have been flying high for a while now.

According to proprietary research done by UBS, borrowers with more than five personal loans rose from 1% in 2018 to 7.7% in March 2023. New disbursement of personal loans to borrowers with weaker credit profiles accounted for 22% of disbursements.

Of all banks, UBS was of the view that state-owned banks and non banking financial companies had a much higher share of weak borrowers compared to private banks.

Analysts believe that pressure on net interest margins and higher credit costs to impact earnings of banks and shadow banks over FY24 and FY25.

Paytm, a fintech company, has recently built a large loan portfolio which is mostly comprised of personal loans. With the RBI cracking down on these loans, the loan growth will be impacted for Paytm too.

Deepak Shenoy, CEO of Capital Mind, took to social media to explain the impact, “See how it affects SBI cards: SBI Cards had credit card receivables of ₹ 45,000 crore with 23% capital adequacy ratio (CAR). So ₹10,500 cr in capital (23% of ₹45Kcr). Increase risk weight to 125% means ₹45K cr=₹56K cr risk weighted assets.”

Shenoy explains that if “SBI Cards wants to grow, and keep high CARs (min is 15% I think?) they’ll need to raise capital and dilute. Which means for the same profit = higher capital. Means lower ROEs.”

ALSO READ: Borrowers with multiple personal loans a big risk to profitability of banks and NBFCs