RBI's Intervention in Unsecured Loans Could Hurt Growth of Banks, NBFCS

Undeterred growth and risk mispricing in unsecured loans, mainly personal loans, cards over the past two years invite warning shots from the RBI, Emkay Global Financial Services said in a report.

Post Covid-19, most lenders have turned pro-risk and, in the quest to accelerate growth/profitability, are chasing unsecured loan growth, including PL, Cards.

“However, undeterred growth in PL (particularly low value/short-term PL and multiple PL) by regulated entities directly/indirectly via fintechs could pose a risk not only to the portfolio/B-sheet health of the regulated entities but also to the customers who are already facing the heat of inflation/higher leverage,” the report said.

Additionally, lenders have not fully passed on the rate hikes in the PL segment thus raising the risk of mispricing of credit/interest rates. MFI growth is also running high and remains vulnerable to exogenous risks (political/climatic vagaries), but most NBFC–MFI/SFBs have increased the lending rates (150-250bps) and have indicated to build contingent buffers over the next 2-3 years.

The RBI has repeatedly fired warning shots amid runaway unsecured loan growth, including PL (particularly for a few players), and reiterated its intention in its recent monetary policy to intervene in the absence of voluntary discipline, including strengthening internal surveillance and safeguards, the report said.

Our discussion with the bankers suggests that the RBI may not want to derail festive growth and, thus, possibly could initiate some action, if any, post the festive season depending on the voluntary steps taken by the REs in the interim period. If not satisfied, the RBI’s action could manifest via increasing standard asset provisions on unsecured loans (mainly Cards/PL/CD) by around 50bps or increasing capital cost via a 25 per cent increase in risk weight (RWA) on overall unsecured loans as of FY24E/incremental loans over FY22-FY24E, the report said.

Although the impact of any RBI action on RoA/BVPS will be limited barring a few entities, we believe the indirect fallout of any such RBI signaling will be mainly on growth, given rising dependence on unsecured retail loans amid moderation in mortgages, the report said. Separately, our channel check suggests stress build-up in the unsecured segment in some pockets.