Banks, NBFCs may see some slowdown on back of RBI's risk weight rejig: ICRA

In a significant move responding to concerns about the rapid increase in unsecured retail loans, the Reserve Bank of India (RBI) has implemented new regulations affecting banks, non-banking financial companies (NBFCs), and fintechs.

The central bank has increased the risk weights on unsecured consumer loans, such as credit cards, by 25%, aiming to address the rising systemic risk associated with these loans.

To put it simply, the RBI is making it a bit more expensive for banks and NBFCs to offer unsecured loans, like credit cards, by requiring them to set aside more capital as a safety measure. This decision is crucial because it directly impacts how much money these financial institutions can lend to consumers without collateral.

Karthik Srinivasan, Senior Vice President at ICRA, explained the potential consequences of these changes in an interview with CNBC-TV18. He highlighted that these regulations are prompting financial entities to rethink their strategies.

He noted, " With these regulations, we believe banks, NBFCs, fintechs, are all re-evaluating their strategy with respect to the business model. So till the time there is some clarity, we would see some slowdown.”

Srinivasan also pointed out that the RBI's move could lead to a slowdown in lending to NBFCs, which might affect the growth of their assets under management (AUM) over the next year.

“Clearly, with RBI not only increasing the risk weight on unsecured loans, but also on lending to NBFCs we believe that the funding to NBFC's could slow down or in other words bank may become a bit more choosy in their NBFC counterpart, which could lead to an overall slowdown in the in the NBFC AUM growth over the next 12 months," he said.

The impact of these changes is evident in companies like Paytm, which saw a 30% decline in its value after announcing a reduction in small ticket loans below ₹50,000.

Digant Haria, Co-Founder of GreenEdge Wealth Services, shed light on Paytm's situation, saying, "After the RBI diktat, it is only natural that those partners will say that there's a lot of risk in BNPL (Buy Now Pay Later) and let's go slow on the BNPL."

Haria explained that Paytm, being an asset-light model, depends on borrowing balance sheets from other financial institutions. This lack of control over its own balance sheet makes it challenging for Paytm to navigate through regulatory changes.

He also emphasised that the RBI's new regulations are unique because they don't differentiate between personal loans from banks or NBFCs.

Haria believes this activity-based regulation will impact everyone in the sector, causing a system-wide increase in funding costs.