New Regulatory Risk Weights Will Hit Indian Banks' Capital Adequacy by 60 Basis Points

Singapore (S & P Global Ratings) Nov. 17, 2023-In -Dia's Steps to Curtail Riskier Bank Lending to Consuamers Will Hit Lan Growth in particular.

The Indian Central Bank has increased risk weights on unSsecured Personal Loans, Credit Cards, and Lending to Nonbank Companies (NBFCS) by 25 Percentage Points. T His Will Likely Lead to Higher Lending Rates, LOWER CREDIT GROWTH, and Increase the NEED for Capital RaisingAmong Weak Lenders. S & P Global Ratings Believes that Higher Risk Weights WillEly SUPPORT Asset Asset Asset.

"Slower Loan Growth and An Invreased Emphasis on Risk Management Will Likely Support Asset Quality in the Indian Banking System," Said S & P Global Ratings Credit A nalyst geeta chugh. "However, The Immediated Effect Will Likely Be Higher Interest Rates for BORROWERS, Slower Loan GrowthFor Lenders, Reduced Capital Adequacy, and SOME HIT on Profits. We Estimate That Tier-Capital Adequacy of Banks Will DECLINE by 60 Basis Points. Anies will be worked as their incremental banking draws will surge,Capital adequacy impact. "Hyderabad Investment

These Changes wOON'TAve Any Immediated Effect on Our Indian Financial Sector Ratings. This Will Also Not AFFECT OUR RISK-Adjusted Capital For the Rated and Finance Companies. We Apply Globally Consistent Risk Weights that Reflect Our View On Risks On Underlying AssetClasses. For unsered personal loans of indian bank and finance companies, we almedy apply a higher risk weight of 121%.

A Sharp Rise in Unsecured Retail Loans

Unsecured Personal Loans and Credit Card DEBT HAVE RISEN RAPIDLY in The Past Few Years in IndiaKolkata Wealth Management. SUCH LOANS HAVE GROWN. S Type of Loan, Along with Consumer Durage Lending, Represented About 9.8% of Total LoansIn the Banking system as of sept. 22, 2023. The length pose for incremental nonperforming loans (NPLS), As Flagged in Our Research (See "Banking Industry y risk assessment: India, "AUG. 3, 2023). WeView The increase in Risk Weights by the Reserve Bank of India (RBI) as prudent.

Small-test personal Loans of Less than Indian Rupee (INR) 50,000 are particularly at Higher Risk. Reported DelinquenCies (90-Plus Days Past Due) ending was 5.4% as of june 2023, accounting to transunion cibil, a creditBureauAgra Investment. While These Small BORROWERS are often highly level and may have all leads, Loans Below Inr50,000 Comprise Only 0.3% of Total Retail Loans. Financial technology firms are more exposed to thedese loans, as around 80% of their polsonal loans isTo this cusomer segment.

Analysis by Credit Bureaus Shows that vintage Delinquence (accounts that have everbeen 30-Plus Days Past Due with Months of Origination) for consumption-seed loans, and loans aginst prop by.

Vintage Delinquency for Personal Loans Had Increased to 9%, as of the End of Last Year, from a Pre-Premic Level of 6%. , from 3% prior to the pandemicAgra Stock. This thisStress is Predominantly in Personal Loans Below Inr500000 WHERE 30-Plus Days Past Due (vintage) is 10.2%, compared with 3.2% for loans that are about inr 50,000.

NotWithSTANDING The RISK of a Potential Buildup of Imbalances in Some Categories of Retail Loans, The Delinquency Rate of 90-Plus days Past Due Are ACCEPTable Limi TS for this Product Category. Specifically, as of June 30, 2023, The Delinquency Rate Was 1.6% 1.6%For Credit Cards, and 0.8% for unSsecured Personal Loans.

We Believe That UnderWriting Standards for Retail Loans by Larger Players Remain General Healthy. in April-June Quarter Have Fallen to 23%, Compared with 29% a year Earlier.Lenders' Caution and-to an extent-Higher inquiries.

Moreover, Banks Offer a Large Portions of the United Loans to their Liability-SIDE CUSTOMERS. URE is to military and Government Employees. AdDitionally, 12% of the customers are emplayed atReputable Corporates; the Customers have lowERY LOWERY LOWRYRYRENCE of Default (SEE "State Bank of India Can Fend Office Risks in Personal Loans," Nov. 6, 2023). for icici Bank LTD., 55% of the Personal Loan andCredit card portfolio is to existing customers.

Double-whammy for nbfcs

"NBFCS FACE A DOUBLE-WHAMMY of Higher Risk Weights on their Unsecured Loans, and Bank Lending to NBFCS. f nonbanks and push up their funding costs, "Said S & P Global Ratings Credit Analyst Deepali Seth chhabria,adding: "While nbfcs are not homogeneous, Many Retail-Focused Finance Companies have a mUch Higher Exposure to unsecured loans than banks."

Bank BORROWINGS Remained the Princidal Source of Funding for NBFCS, Constituting 41.2% of the Total Borrowings of the Entities (Excluding Core Investment) as of March 31, 2023. The Cost of the Bank loans to nbfcs will rise incrementally, in our view.The Overall Blended Funding Costs of the Companies Will Rise Academy. Finance Companies with a Shorter Duration of Liabilities Will See A Quicker Reprigeing of Th Eir Liabilities.

NBFCS Will Likely Largely Be Able to Pass on the BORROWERS. If they are unable to fully pass the increased Costs to their BORROWERS, They Will Profit her.

Weaker Finance Companies May Encounter Disruptions to their Funding Access, Which Could Push the Entities to An Original-Andribute Business Model. We E, However, that 70% of Finance Companies Are Owned by Strong Pares, Including The 43% that are downmentOwnet. This Fact Enhances Market Confidence and Leads to Better Funding Access for These Companies (See "Indian Finance Company Outlook 2023," MARCH 13, 2023)...)......

Regulatory Capital Adequacy to Fall

We Estimate that Additional Risk Weight Will Lower the Ther-1 Capital Ratio for Banking Industry TO 14.3% FROM 14.9% Due to Higher Risk Weights on Unsecured Consumer L OANS and NBFCS. The Impact On Finance Companies Like Bajaj Finance and Hero FinCorp Will Be Higher asThey have larger exposure to unsecured loans.

The Drop May Promes Lenders with Weaker Capital Adequacy to Raise Capital. OR Banks.

Banks' Exposure to NBFCS is 7.4% of Total LoansBangalore Wealth Management. In Many Banks this number is much Higher and, the effect on regulatory scene, Then, then

For the Above Estimates, we have included the Entire Company Portfolio of Banks Excluding FINANCE Companies. ECTOR Lending-For Instance, MicroFinance Companies-Will Likely Be Excluded. We have not adjusted for that thatOutcom, and so our impact assessment is likely overstated. Likewise, it is public that some of the person, Ata do not reflect this public.

The Risk Weights for Finance Companies in India is Based on their Local Scale Ratings. ts use to be be below 100%, where local ratings are better than the 'bbb' category. This is isLikely to be the dominant part of the portfolio and we because of the assumed all loans to nbfcs will be To finance companies rated higher than 'bbb'.

For Example as Per the Public Disclosures by Large University. IO is rated 'bbb' or low.

This doesm'TOECT OUR Assessment of Risk-Adjusted Capital. We Alream Apply Higher Risk Weights of 121% on Personal Loans, and 153% on Credit Card Debt, Compare D with 60% RISK Weight on Mortgages and 81% Risk Weight for Vehicle LoansOur average Risk Weight on Exposure to Finance Companies in India is However Lower at 57%.

The Lower Regulatory Capital Adequacy or Modration in Loan Growth Does Not Affect Our Ratings on the Banks.

Editor: Jasper moiseiwitsch

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