Nifty slips on RBI tightening of unsecured retail lending

Also, lingering uncertainty about the Gaza war trajectory affected risk trade sentiment despite hopes of an early RBI/Fed rate cut

India’s benchmark stock index Nifty closed around 19731.80 Friday; slipped almost -0.17% for the day and almost -200 points from the multi-week high of 19875.25 scaled late Thursday. Overall, Nifty surged almost +1.60% for the week on hopes of an early RBI rate cut (from Feb’24) and a pause of the Gaza war. Nifty jumped almost 3.42% in November (till 17^th) and recovered almost +1000 points from the September low of 18837.85 on the easing of Gaza war tensions (from becoming a wider regional conflict involving Iran), progress of ceasefire negotiations, and hopes of Fed/RBI pause/pivot/rate cuts.

Late Thursday, Nifty stumbled from around 19875 after RBI unexpectedly decided to increase risk weight assets (RWA) by +25% on unsecured personal lending, consisting mainly of credit cards, personal loans, and LAP. RBI, to an extent, goes back to withdrawing the relaxation it had given in 2019 to boost overall economic activities after the DEMO recession/slowdown. In Sep’19, RBI reduced RWA's requirement on unsecured retail lending by -25% (from 125% to 100%) to boost consumer spending ahead of festival season.

Now, SCB/NBFCs have to implement the stricter regulatory requirement of unsecured retail lending ASAP or by Feb’24:

·         All retail loans, except secured housing loans, vehicle loans & jewelry loans, and priority sector loans such as educational loans; i.e. unsecured personal loans etc, will now attract 125% RWA (+25% increase)

·         Credit cards issued by SCBs and NBFCs will now attract 150% and 125% RWAs, an increase of +25% from previous levels

·         SCB loans to NBFCs (except MFI loans) will now attract a +25% higher external rating; minimum 125% RWA vs 100% earlier

·         The credit standard/evaluation process will be strengthened for all unsecured retail lending with an appropriate limit/cap on the borrower

On Thursday (16^th November), RBI issued a circular: Regulatory measures towards consumer credit and bank credit to NBFCs

SCB-Scheduled Commercial Banks (including Small Finance Banks, Local Area Banks, and Regional Rural Banks)

NBFC-Non-Banking Financial Companies (including HFCs)

Please refer to the Governor’s Statement dated October 6, 2023, flagging the high growth in certain components of consumer credit and advising banks and non-banking financial companies (NBFCs) to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards, in their interest. The high growth seen in consumer credit and increasing dependency of NBFCs on bank borrowings were also highlighted by the Governor in the interactions with MD/CEOs of major banks and large NBFCs in July and August 2023, respectively.

In this context, it has been decided to effect the following measures as under:

Consumer credit exposure

(a) Consumer credit exposure of commercial banks

As per extant instructions applicable to commercial banks, consumer credit attracts a risk weight of 100%. On a review, it has been decided to increase the risk weights concerning consumer credit exposure of commercial banks (outstanding as well as new), including personal loans, but excluding housing loans, education loans, vehicle loans, and loans secured by gold and gold jewelry, by 25 percentage points to 125%.

(b) Consumer credit exposure of NBFCs

In terms of extant norms, NBFCs’ loan exposures generally attract a risk weight of 100%. On a review, it has been decided that the consumer credit exposure of NBFCs (outstanding as well as new) categorized as retail loans, excluding housing loans, educational loans, vehicle loans, loans against gold jewelry, and microfinance/SHG loans, shall attract a risk weight of 125%.

(c) Credit card receivables

As per extant instructions, credit card receivables of scheduled commercial banks (SCBs) attract a risk weight of 125% while those of NBFCs attract a risk weight of 100%. On a review, it has been decided to increase the risk weights on such exposures by 25 percentage points to 150% and 125% for SCBs and NBFCs respectively.

Bank credit to NBFCs

In terms of extant norms, exposures of SCBs to NBFCs, excluding core investment companies, are risk-weighted as per the ratings assigned by accredited external credit assessment institutions (ECAI). On a review, it has been decided to increase the risk weights on such exposures of SCBs by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs is below 100%. For this purpose, loans to HFCs, and loans to NBFCs that are eligible for classification as priority sectors in terms of the extant instructions shall be excluded.

Strengthening credit standards

(a) The REs shall review their extant sectoral exposure limits for consumer credit and put in place, if not already there, board-approved limits in respect of various sub-segments under consumer credit as may be considered necessary by the Boards as part of prudent risk management. In particular, limits shall be prescribed for all unsecured consumer credit exposures. The limits so fixed shall be strictly adhered to and monitored on an ongoing basis by the Risk Management Committee.

(b) All top-up loans extended by REs against movable assets that are inherently depreciating in nature, such as vehicles, shall be treated as unsecured loans for credit appraisal, prudential limits and exposure purposes.

The above instructions have been issued in exercise of the powers conferred by Sections 21 and 35A of the Banking Regulation Act, 1949; Chapter IIIB of the Reserve Bank of India Act, 1934 and Sections 30A, 32 and 33 of the National Housing Bank Act, 1987.

The above instructions, other than paragraph 2C (a), shall come into force with immediate effect. All REs shall endeavor to comply with the provisions in paragraph 2C (a) at the earliest, but in any case shall implement them by no later than February 29, 2024

Impact of RBI’s tighter regulation of unsecured retail lending:

RBI already raised an alarm about exponential/unusually high growth of unsecured retail lending in its last policy meeting statement on 6^th October’23; before that RBI also interacted the issue with major SCBs and NBFCs in July and August’23. RBI is concerned about the possible built-up of retail NPA/stressed asset risks in the banking system as a result of unusual credit growths in unsecured retail/consumer lending, even at higher borrowing costs. RBI is also concerned about increasing dependency on NBFCs for bank funding as any solvency issues of such NBFCs may also affect the concerned SCB/Bank, which has high exposure to such NBFCs.

In any way, the market didn’t see/realize the RBI alarm signal over unsecured retail lending and thus the latest RBI circular on 16^th November came as a shock to the market to some extent. Eventually, banks & financials (SCB/NBFCs) now have to set aside higher capital as RWA for such unsecured retail lending/exposure, which will increase the cost of funding and also higher borrowing costs for the consumers/retail borrowers (if SCB/NBFCs pass the higher cost of funding to the retail borrowers).

This will eventually slow down the unusual credit growth of unsecured retail lending for banks, which enjoy a good margin on such loans. Also, many banks & financials may have to raise additional capital/equity/loans to fund such higher RWAs, which may affect core operating profit/margin (EBTDA). Also, sales of many consumer durable goods companies may be affected to some extent as a result of RBI’s new/stricter lending rules as nowadays, most of the sales are happening through the EMI route, especially so-called zero finance schemes. But consumers are also ready to pay more to afford such durable/electronic goods (AC, Refrigerators, Washing Machine, Mobile etc). Also, manufacturers of such durable goods have usually a high margin or increased MRP and pass on a portion of that to the concerned financier (banks/NBFCs) to finance the zero-interest finance scheme to support sales volume.

Thus private banks & financials, having relatively high exposure to such unsecured retail lending may be affected more than their PSU peers as the latter has relatively lower exposure and a maximum of that too against ‘secured’ (at least unofficially) salary accounts of PSU companies and big private companies and also other tangible assets such as FD, LIC/LI polices kept with the bank. Even private banks now usually do not extend naked unsecured retail lending to individual entities despite the ‘robust recovery’ mechanism. Private banks also now extend such unsecured retail credit to only those ‘known’ customers/borrowers having salary accounts or some other banking relation, so that they can easily ‘attach’ those accounts in case of chronic default.

Also, even after the passage of possible higher borrowing costs, say +0.25% to such unsecured retail loans, the demand for such loans may not be affected significantly in India and banks are always ready to lend to quality and qualified/eligible borrowers despite tighter lending norms.

As per reports, the following banks & financials may be affected/have to raise fresh capital/loans to fund increasing RWAs:

·         SBI/SBI Cards, BOB, Canara Bank, Federal Bank, DCB, RBL, Federal Bank, ICICI, and Axis Bank may be affected more along with Bajaj Finance, IDFC First and others having high exposure in unsecured consumer loans

·         HDFC and Kotak Bank may be less affected due to their conservative retail lending norm (unsecured)

·         Many banks & NBFCs may now approach RBI for fixing sectoral consumer credit limit  and to seek other clarifications

·         Small ticket loans (less than Rs.50,000) for consumer durable purchases may be worst affected

·         In the near term, no impact on NIMs for NBFCs, Over time, banks will start to ask-- say 20 bps higher rate from AA-rated NBFCs

·         Banking sector capital adequacy for all large banks may come down by 50 bps, but won't pinch right away

·         Eventually, borrowing costs may be further increased for such unsecured consumer retail lending, which may also affect overall demand and help bring down inflation

Bottom line:

Banks & financials/NBFCs having relatively high exposure in unsecured retail lending may be affected to some extent along with producers/marketers of certain consumer durable/electronic goods to some extent, but not significantly. On the other side, secured retail lending such as housing/home loans and motor vehicles/car loans, loan against the gold segment is not affected due to RBI’s stricter lending norms. But LAP (Loan against property) or LAC (loan against car); i.e. all top-up loans against movable assets will be classified as unsecured lending considering the inherent depreciation nature of such underlying assets and thus have to be evaluated prudentially.

Market wrap:

Overall, Nifty surged almost +1.60% for the week on hopes of an early RBI rate cut (from Feb’24) and a pause of the Gaza war, but also dragged in the last two trading sessions amid RBI regulatory tightening for unsecured retail lending.

For the week, Nifty was boosted by Infy, TCS, HCL Tech (renewed U.S. optimism amid hopes of an early Fed cut), RIL, HDFC Bank, L&T, Tata Motors (renewed China and India Festival season optimism), Coal India (higher domestic coal prices and optimism of record profit), M&M, Eicher Motors, NTPC and Tata Steel (higher Chinese demand/prices), while dragged by ICICI Bank, Axis Bank, Bajaj Finance, SBIN, Indusind Bank (tighter RBI regulation for unsecured retail lending) and Powergrid.

For the week, Indian Market was boosted by techs (renewed US optimism amid hopes & hypes of an early Fed rate cut), realty, automobiles (upbeat Festival season sales in India and Chinese optimism), metals (higher steel prices/China optimism), energy (OMCs/refineries surged on lower oil), media, infra, pharma, and FMCG, while dragged by banks & financials (RBI regulatory tightening for unsecured retail lending). Exporters also helped amid higher USDINR and renewed US/Europe optimism as the Fed/ECB rate hike cycle is now almost over. Also, the progress of the Gaza war pause/ceasefire supported the overall risk trade sentiment along with lower oil and lower core inflation  around 4.2% for October;

Technical trading levels: Nifty Future

Whatever may be the narrative, technically Nifty Future (19803) now has to sustain over 20100 for a further rally to 20200/20300 levels in the coming days; otherwise sustaining below 20050/20000-19950/19900, Nifty Future may again fall to 19700/19600-19500/19380 and 19300/19150-19050/18950 and 18830/18750-18625/18490-18275/18075 in the coming days.

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