Industry executives said the Reserve Bank of India has taken several measures to reduce high growth in consumer credit, a move that will impact consumer spending and many start-ups in the South Asian market. The Reserve Bank of India has increased the risk weight of unsecured personal loans, credit cards and consumer durables loans by banks and non-banking financial companies (NBFCs) by 25% to 125%. The RBI said the new measures exclude mortgages, car loans and education loans, as well as gold-backed debt.
Similar measures were announced for banks. It increases the risk weighting of credit card receivables of banks and non-bank financial companies to 150% and 125% from 125% and 100% respectively.
The decision came after data showed unsecured lending was growing at almost twice the rate of total credit expansion. Goldman Sachs analysts said on Friday that the measures showed the Reserve Bank of India was "increasingly wary of the growth of these loans".
The tightening of lending partners will have an impact on many startups as they mostly rely on NBFCs to disburse loans to consumers. One fintech founder, who spoke on condition of anonymity to avoid any fallout, said the move would reduce growth "a little bit" while also increasing the cost of capital for startups to borrow.
"For Paytm's lending partners, higher financing costs and higher capital requirements will impact BNPL/PL's product profitability." Jefferies analysts wrote in a report: "They may respond to the current high growth levels by tightening credit standards and/or slowing down the pace of growth."
Analysts said the measures showed the RBI's concerns about excessive growth in unsecured loans and the increased dependence of non-bank financial companies on bank funds.
Goldman Sachs analysts said: "We believe that the implementation of these measures will, at least in theory, reduce structural ROI for consumer lending, especially for NBFCs with higher costs of accessing funds from the banking system and high competition, as we have highlighted earlier that increased competition implies lower unit economics, slower growth and/or asset quality challenges."
Many lenders including Bajaj Finance, IDFC First and SBI, which have historically had the highest proportion of unsecured personal loans in their books, are expected to be affected the most.
"Bank funding to NBFCs has been increasing in the Indian financial sector over the past few years and now accounts for more than 50% of NBFC borrowings. On the other hand, the share of borrowings from mutual funds/insurers has been declining. This has prompted them to take action based on previous RBI announcements, which in turn will make it more expensive for NBFCs to borrow from banks. Additionally, we believe this may also intensify competition from other sources of borrowing, thereby pushing up overall funding costs," Goldman Sachs analysts added.