© Reuters.
The recent policy changes by the Reserve Bank of India (RBI) mandating increased risk weights on unsecured loans and lending to Non-Banking Financial Companies (NBFCs) have sent banking sector shares tumbling today. Emkay Global Financial Services warned that this immediate implementation could constrain banking sector growth due to the need for higher capital reserves, potentially leading to increases in lending rates.
The stock market reacted swiftly to these developments, with significant drops in banking shares. RBL Bank saw a sharp decline of 7.7%, while SBI Cards fell by 5%, reflecting investor concerns over the impact of the new regulations on the financial sector’s profitability.
Analysts have noted that banks with substantial exposure to unsecured loans and NBFCs could face reductions in Common Equity Tier-1 (CET-1) capital by up to 127 basis points (bps). Moreover, Tier I capital for some NBFCs might be affected by as much as 384 bps. These predictions come despite certain sectors like vehicle finance and housing finance showing more resilience.
From March 2020 until September 2023, unsecured loan growth boasted an impressive Compound Annual Growth Rate (CAGR) of 18.1%, while lending to NBFCs grew at a CAGR of 12%. The new regulatory environment poses a challenge to maintaining such growth rates, as financial institutions grapple with the need for increased capital buffers against potential risks.
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