Credit growth remains strong but some slowdown likely over RBI's tight consumer lending norms

New age fintechs in the consumer lending space are likely to bear the brunt


The credit growth that banks and non-banking finance companies have seen in India over the past year has remained strong with the onset of the festive season. The latest data by the Reserve Bank of India and credit ratings agency CareEdge shows credit offtake increased a little over 20 per cent year-on-year to reach Rs 155.7 lakh crore in the fortnight ending November 3, 2023.

Retail personal loans continued to drive this growth but the completion of the merger of Housing Development Finance Corp with its unit HDFC Bank also had an impact. Excluding this merger impact, credit growth was at 15.9 per cent in the same period, slightly lower than the last year's growth of 17 per cent.

"The outlook for bank credit offtake continues to remain positive for FY24, supported by factors such as economic expansion and a continued push for retail credit which has been supported by improving digitalisation," CareEdge said.

Over the past 18 months, interest rates on loans as well as deposits have gone up significantly in the wake of RBI raising the repo rate to 6.5 per cent from 4 per cent. Still credit growth continues to outpace deposit growth.

Including the merger impact, deposits for the fortnight grew 13.5 per cent from a year ago to touch Rs 195.1 lakh crore as of November 3, 2023. Without considering the merger, deposit growth was slightly lower at 12.7 per cent, still much more than the 8.2 per cent deposit growth recorded last year.

"Deposits have seen robust performance since post-Covid times, however, in recent times, credit growth has been significantly outperforming deposit growth, this can be mainly attributed to lower base effect in credit and merger impact," according to the ratings agency.

RBI has been worried about the strong uptick in personal loans for some time now, and last week cracked the whip, by raising the risk weights on consumer loans, credit card exposures and loans to NBFCs by 25 percentage points each. This could lead to some slowdown in the growth in these segments and affect tier I capital ratios of the lenders, say analysts.

New age fintechs in the consumer lending space are likely to bear the brunt with their tier 1 capital being squeezed up to 700 basis points, depending on their capital levels, according to India Ratings and Research.

"Curtailing of NBFCs' exposure to unsecured credit (loans to individuals) would have a direct impact on new-age fintech companies, which have been aggressively growing their balance sheet through co-lending and direct lending," according to the ratings firm.

The fintechs' ability to source liability would face challenge and would come at higher costs. Furthermore, NBFCs' on-lending to fintech firms through co-lending or direct lending could also see growth moderate with the rise in the risk weight, India Ratings noted.

On the other hand, the increase in the risk weight on consumer credit, credit card receivables and exposure to NBFCs would affect banks' tier I capital by 25 bps-75 bps, with an overall impact on the sector's tier I capital remaining around 50 bps, it said.

For larger traditional NBFCs, the impact on their tier I capital could be 25 bps-300 bps, based on the share of unsecured individual loans in the overall loan mix, added India Ratings.

Increase in risk weight across bank exposure to NBFCs is also likely to keep funding cost elevated for the shadow banks.

"The move could lead to a substantial recalibration by banks, given that a few public sector banks had high sectoral exposure to NBFCs, while their private peers have been quite calibrated in increasing their exposure to the NBFC segment," said India Ratings.

NBFCs would also need to meet incremental demand for funds by raising money through capital markets. While large NBFCs already have access to capital markets, the smaller peers could be impacted here.

Join our WhatsApp Channel to get the latest news, exclusives and videos on WhatsApp