Top banking and non-banking finance company stocks including SBI Cards, Bajaj Finance, HDFC Bank, and ICICI Bank and declined up to 6 percent on November 17, a day after the Reserve Bank of India (RBI) tightened norms for personal loans and credit cards to check the unbridled growth in this segment.
The central bank has raised credit risk weights on unsecured consumer loans by increasing the capital requirements for such loans as concerns have been growing over these borrowings.
Analysts have warned that higher unsecured credit risk would adversely impact capital adequacy ratios (CARs) of lenders, which provides a quick idea of whether a bank has enough funds to cover losses and remain solvent under difficult financial circumstances.
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For Bajaj Finance, analysts at CLSA and Citi denoted up to a whopping 230 basis points (bps) impact in CAR (capital adequacy ratio). As for HDFC Bank, ICICI Bank, Axis Bank, and SBI, the rise in credit risk would impact CET-1 by 50 bps, 42 bps, 36 bps, and 27 bps, respectively.
One basis point in one-hundredth of a percentage point.
Analysts at CLSA have pencilled in 40-80 bps reduction in Tier-1 capital for banks and 415 bps for SBI Cards.
CLSA said that the growth rates of fintech intermediaries such as Paytm would also be hit.
Morgan Stanley warned that the RBI action on consumer credit and bank funding would push up borrowing and lending rates.
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Housing finance companies may gain
Analysts believe that housing finance stocks could be tactical beneficiaries, as they remain unaffected by new RBI norms.
“We prefer Can Fin Homes, PNB Housing Finance, Aptus, and Home First,” analysts added.
The Reserve Bank of India said the consumer credit exposure for banks and NBFCs, excluding housing, education, vehicle, and gold-backed loans, will attract a risk-weight of 125 percent from 100 percent earlier.
The risk-weight for credit card loans by banks was raised to 150 percent from 125 percent. Those by NBFCs will see a risk-weight of 125 percent, up from 100 percent.
A higher risk implies the bank will have to set aside a higher amount as loan provisioning, which will impact capital ratios of lenders and compel them to increase interest rates on such products to curb impact on return of equity (RoE).
Provision refers to the amount banks need to set aside to cover the losses from a loan account. When an account turns into an NPA, the provisions required will equal the full loan amount.
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