In a recent report, the Reserve Bank of India’s (RBI) stringent measures on select banks and non-banking financial companies (NBFCs) are highlighted as pivotal steps towards improving compliance culture and protecting consumers. However, these actions are anticipated to potentially raise capital costs for financial institutions, impacting the sector’s growth trajectory.
The RBI’s recent interventions include restraining IIFL Finance Ltd. and JM Financial Products Ltd. from disbursing gold loans and loans against shares respectively. Paytm Payments Bank Ltd. (PPBL) was also directed to halt the onboarding of new customers. This follows the RBI’s suspension of HDFC Bank in December 2020 from sourcing new credit card customers due to technological disruptions.
Geeta Chugh, a credit analyst at S&P Global, emphasized the regulator’s commitment to bolstering the financial sector. However, she cautioned that the heightened regulatory risk might hinder growth and escalate capital costs for financial entities. The S&P Global report predicts a potential slowdown in credit growth for fiscal 2025, with an estimated decline to 14 per cent from the previous year’s 16 per cent, reflecting the cumulative impact of these regulatory actions.
The RBI’s move to increase risk weights on unsecured personal loans and credit cards is aimed at limiting growth in these segments, further contributing to the tightened lending environment. This includes a 25 per cent increase in risk weights on banks’ exposure towards consumer credit, credit card receivables, and NBFCs, up to 150 per cent.
While these measures are expected to drive banks and finance companies towards improving policies and processes for enhanced operational resilience, they also come with increased compliance costs. This could potentially impede the ability of smaller firms to compete in the market.
Separately, in one of the reports, it is forecasted that the Indian economy will grow at 6.8 per cent in the financial year 2025. This growth is attributed to robust domestic demand and an uptick in exports. However, the report notes that stringent interest rates may dampen demand in the upcoming fiscal year, and the regulatory clampdown on unsecured lending will likely affect credit growth. Additionally, a lower fiscal deficit is predicted to have a dampening effect on overall growth.
