RBI risk weight: Larger banks to face impact of 80 bps on capital adequacy, NBFCs’ cost of funds to rise by 20 bps

The credit card receivables for banks will attract a risk weighting of 150 per cent, while the payments receivables of NBFCs will attract a risk weighting of 125 per cent, compared to 125 per cent and 100 per cent previously. To mitigate the over-dependence of NBFCs on bank loans, RBI has also increased risk weighting on bank loans to NBFCs for certain categories.

Risk weighting of bank loans to NBFCs is governed by the external credit rating of the NBFC. RBI has decided to raise risk weighting on bank loans to those NBFCs where risk weighting is below 100 percent, by 25 percentage points. However, this will exclude loans to housing finance companies (HFCs), and loans to NBFCs eligible for priority sector classification.

The central bank increased the risk weighting for consumer credit exposure, excluding housing, education, vehicle and gold-backed loans, to 125 percent from 100 percent earlier. “The increase in the risk weighting of commercial bank consumer credit exposure (outstanding and new), personal loans, but excludes housing loans, education loans, vehicle loans and loans secured by gold and jewelery gold,” said RBI.

RBI risk weighting impact on banks, NBFCs

Analysts said the immediate impact of RBI’s move to increase the risk weighting on certain categories of unsecured loans, loans to NBFCs and credit card loans is that this will raise the capital requirements of banks, thereby increasing their own costs. capital. From the perspective of macro-financial stability, this is a welcome decision, according to analysts.

Also read: SBI Card, Bajaj Finance, HDFC Bank, another financial collapse after RBI tightens consumer loan norms

”Since the demand for credit in segments like unsecured retail loans is strong, banks can easily pass on the increased cost to borrowers. Therefore, there will be a slight increase in the cost of credit for borrowers. It will have little impact on the banks’ profitability,” said Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

According to domestic brokerage firm JM Financials, it appears that the largest banks including HDFC Bank, ICICI Bank, Axis Bank, State Bank of India and Kotak Mahindra Bank’s Common Equity Tier 1. (CET1) ratios. One basis point is equal to one hundredth of a percentage point. The CET1 ratio compares a bank’s capital to its risk-weighted assets to determine its ability to withstand financial distress.

Within the major NBFCs in brokerage coverage Bajaj Finance has relatively higher exposure given a higher share of consumer credit in its asset mix. However, due to the recent capital raising (Tier 1 at ~22 percent after capital raising and changes after risk weighting), JM Financials does not expect significant changes to the overall yield profile.

Among smaller NBFCs, Poonawalla Fincorp has an impact of ~230-250 bps on Tier 1 given higher share of unsecured loans and overall retail asset portfolio. However, given its high capital adequacy (42 per cent before risk weight changes), the impact on business is likely to be minimal.

“With the shift to raise risk weighting on NBFC loans to banks, we expect cost of funds to inch up for most of the large NBFCs (by 10-20 bps) since risk weighting is less than 100 percent by most of the big NBFCs given their rating profile stands between A and AAA and the banks will pass on a higher capital charge to NBFCs,” said JM Financials.

“We believe that vehicle financiers, housing finance companies, gold loan financiers and NBFC MFIs are quite aware of the implications of this move by the regulator. Within this space, Shriram Finance, Home First Finance and NBFC-MFIs (Fusion Micro Finance) are the best plays,” he said.

Disclaimer: The above opinions and recommendations are the opinions and recommendations of individual analysts or brokerage firms, and are not the opinions of Mint. We encourage investors to check with certified experts before making any investment decision.

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Updated: 17 November 2023, 06:13 PM IST

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