Banks create money, so RBI regulates their growth by a Capital Adequacy Ratio (CAR)—a function of how much the bank can lose of its own money, as a percentage of its loan exposure. The CAR for banks is 10-12% and for NBFCs, 15%. Most such entities keep more than that, to account for growth. When they come close to the limits, they raise funds for expanding their equity. Consider this: If an NBFC is only lending for unsecured consumer loans, and has a CAR of 20%, it would have ₹20 in capital for every ₹100 lent out. The new rules will reduce the CAR from 20% down to 16%, since ₹100 now means an exposure of 125%, or ₹125.

At 16%, the NBFC is too close to the prudential limits and thus, will need to raise capital. Management will now need to find buyers for their shares, to give some headroom for growth.

Given that financiers are restricted primarily by capital in terms of where to grow, expect that they will now reduce their focus on growing consumer loans like credit cards, buy now pay later and personal loans to build more of the ‘secured’ variety. And, they will raise the interest rates for such unsecured personal loans, which means a quick or instant personal loan will be more expensive, going forward.

For NBFCs, there’s a double whammy. Not only do they see a hit to their CAR based on who they lend to, they will also pay more to borrow. NBFCs have their largest borrowings from banks, who would previously get a risk weight of 20% to 50% for the NBFCs rated AAA to A. Now, these ratios increase to 45-75%, respectively. Banks will compensate for this through higher interest rates for such loans, increasing the cost of funds for the NBFCs.

For credit card receivables, banks will see a 150% risk weight (from 125%). Only two NBFCs are allowed to issue cards (BoB cards and SBI Cards) and they will also see increased risk weights from 100% to 125%.

The impact is primarily to unsecured personal loans, so business loans, housing loans and other secured loans don’t see a major impact. Large banks and listed NBFCs will, for the most part, see only a small impact. However, one area that will be heavily hit is credit card issuers and personal loan financiers, especially those that have relatively low CARs already—those will fall further now, and these companies will need to raise more capital.

Some of the recently launched initiatives in the digital world have involved the ability to buy products at zero-cost equated monthly instalments (EMI), where the manufacturer bears the interest cost for you to pay in instalments instead of all at once. Since the mechanism to do this was a financing NBFC or a bank, the interest rates on such loans might go up, reducing the attractiveness of a zero-cost EMI for manufacturers. In essence, expect those ‘buy now, pay later’ mechanisms to lose their sheen. Many fin-tech lenders might have to see reduced profitability or margins with the new rules.

What this will do for consumers is to increase interest rates for loans, or reduce availability of easy credit. Expect higher interest rates for new loan applications, and expect to be rejected more often. Clarifications are still due on whether small-ticket microfinance loans by banks get impacted, and whether loans secured by fixed deposits and securities also see higher risk weights. As RBI clears its position, the impact on loan rates, disbursement and rejection percentages and the capital raising requirements for lenders will become more apparent.

While this might be unfortunate for some, RBI appears to have acted to prevent a larger crisis, given the strong growth in small ticket personal loans. In the banking industry, growing too fast in any particular sector has usually led to unsavoury lending practices, evergreening and eventually, defaults, and the universally recognized way to solve the problem has been: increase the cost to lenders by raising risk weights.

Deepak Shenoy is founder and CEO at Capitalmind Financial Services, a Sebi-registered portfolio manager, based in Bangalore.

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Updated: 22 Nov 2023, 12:20 AM IST