Shares of banks and non-banking financial companies (NBFCs) were reeling under selling stress in early trade on Friday after the Reserve Bank of India (RBI) tightened norms for consumer loans. State Bank of India (SBI), the country’s largest commercial bank, topped the losers chart, followed by Axis Bank, Canara Bank, HDFC Bank, Bank of Baroda, among others.
Shares of SBI declined as much as 3.2% in the first hour of trade so far, while other PSU lenders Bank of Baroda, Canara Bank declined in the range of 1-2%.
Among private players, Axis Bank was the top laggard, falling as much as 2.5% after the RBI slapped a monetary penalty of ₹90.92 lakh on the bank for violation of certain regulatory norms. The central bank said that the fine was imposed on Axis Bank “for non-compliance with certain directions issued by RBI on ‘Reserve Bank of India (Know Your Customer (KYC)) Directions, 2016’, ‘Loans and Advances – Statutory and Other Restrictions’, ‘Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by banks’ and ‘Code of Conduct for Opening and Operating Current Accounts’”.
Among others, HDFC Bank, the country’s largest private lender in terms of market capitalisation, was down 0.5%, whereas ICICI Bank and Federal Bank dropped marginally.
In a notification issued on Thursday, the RBI increased the risk weights on unsecured consumer loans, including credit cards, by 25% for both banks and NBFCs. Risk weight in respect of consumer credit exposure of banks and NBFCs (which includes outstanding as well as new exposures), including personal loans, but excluding housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery, and microfinance/SHG loans have been raised by 25 percentage points to 125% from the current 100%.
In addition, risk weight on credit card receivables for banks have been increased by 25 percentage points to 150% for banks 125% for NBFCs (only two NBFCs are permitted to issue credit cards viz. SBI Cards and Payment Services Private Limited and BOB Financial Solutions Limited).
According to analysts at JM Financial, consumer lending products and credit cards segments have witnessed significant growth over the past couple of years and the move is targeted to curb incipient risks building in these segments. Also, in order to reduce reliance of NBFCs on bank lending, risk weights on bank exposures to NBFCs have also been raised.
“As per initial calculations, larger banks (HDFCB, ICICBC, AXSB, KMB and SBIN) seem to have a potential overall impact of 70-80bps on CET1 ratios. Within larger NBFCs in our coverage Bajaj Finance has relatively higher impact given higher share of consumer credit in its asset mix,” it says in a report.
“Amongst smaller NBFCs, Poonawalla Fincorp has an impact of 230-250 bps on Tier1 given higher share of unsecured loans and fully retail asset portfolio. However given its high capital adequacy (42% prior to risk weight changes), impact on business is likely to be minimal,” it adds.
The agency says that the move to raise risk weights on NBFC lending for banks may lead to rise in cost of funds for most larger NBFCs (by 10-20bps) given that most large NBFCs have risk weights of more than 100% given their rating profile stands between A to AAA and banks will pass on higher capital charge to NBFCs.
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