The Reserve Bank of India’s decision on personal loans, known as unsecured personal loans, is likely to reduce the capital adequacy of banks by 0.6 per cent. Credit rating agency S&P Global Ratings gave this information on Friday. The Reserve Bank of India has tightened the rules for banks and non-banking financial companies (NBFCs) regarding unsecured loans like personal loans, credit cards. The revised criteria increased the risk rate by 25 percent.
Fear of pressure on non-banking sector
With this step, customers will get less risky bank loans. There is also a possibility of pressure especially on the non-bank sector. S&P Global Ratings said this would raise interest rates on loans, reduce credit growth and increase the need for weaker financial institutions to raise capital. On the other hand, higher risk weighting will ultimately lead to better asset quality.
probability of impact
Geeta Chugh, credit analyst at S&P Global Ratings, said in a statement that slower credit growth and greater emphasis on risk management will improve asset quality in the Indian banking system. “However, its immediate impact is likely to be higher interest rates for borrowers, slower credit growth for financial institutions, reduced capital adequacy and little impact on profits,” he said. “We estimate that the share capital (Tier-1) adequacy of banks will decline by about 0.6 per cent.”
Financial companies will be badly affected
“Financial companies will be most affected by this as their incremental bank credit costs will increase, and capital adequacy will also be affected,” Geeta Chugh said. The rating agency also said the changes would have a negative impact on India’s financial performance. There will be no immediate impact on the credibility of the financial sector. This will also not affect the risk-adjusted capital ratio of rated banks and financial companies.