RBI’s Proactive Measures to Enhance Financial Stability
The Reserve Bank of India (RBI) has taken proactive steps to address potential systemic risks arising from the rapid expansion of consumer credit in India. These measures, affecting both banks and non-bank financial institutions (NBFIs), aim to strengthen the country’s financial stability.
Regulatory Adjustments
Fitch Ratings has provided insights into the implications of these regulatory changes on the financial sector. The primary focus of these adjustments is to require banks and NBFIs to allocate more capital against unsecured consumer credit, such as credit card loans and personal loans.
Credit-Positive Effort
Fitch Ratings views these regulatory changes positively, considering them as a credit-positive effort by regulatory authorities to mitigate emerging risks in consumer credit. The significant surge in unsecured credit card loans and personal loans raised concerns, prompting the need for preventive measures.
Addressing Risk Appetite
The increasing exposure to unsecured consumer credit, considered a riskier loan category, reflects a growing risk appetite among banks and NBFIs. This trend is driven by institutions aiming to protect net interest margins amid intense competition for secured retail loans.
Impact of Regulatory Changes
The regulatory adjustments introduce higher risk weightings for both banks and NBFIs. While risk weightings for credit card lending increase to 125 per cent for NBFIs and 150 per cent for banks, microfinance remains exempt from higher risk weights for NBFIs.
Estimation of Impact
Fitch Ratings estimates that these measures may lower the common equity Tier 1 (CET1) ratio of the banking system by around 30 basis points. Private banks, with better CET1 capitalization, are expected to maintain reasonable capitalization despite the changes.
Implications for NBFIs
Fitch-rated NBFIs, including Shriram Finance Limited, Muthoot Finance Ltd, IIFL Finance Limited, and Manappuram Finance Limited, may experience impacts on capitalization ratios, loan growth, and future asset quality. However, the overall impact is anticipated to be limited, benefiting from reduced systemic risk.
Phased Implementation
The phased implementation of these measures highlights regulators’ commitment to maintaining financial stability while providing financial institutions with time to adapt to the new norms. These adjustments aim to strike a balance between promoting consumer credit growth and preventing systemic risks.
As India’s financial landscape undergoes these adjustments, stakeholders are closely monitoring their impact on lending practices, risk management, and overall economic resilience.
