India’s central bank has imposed several measures to cool high growth in consumer credit in a move that will impact consumer spending and several startups in the South Asian market, industry executives said.
Reserve Bank of India hike Risk weights On unsecured personal loans, credit cards, consumer durable loans by banks and non-banking financial companies (NBFCs) by 25% points to 125%. The Reserve Bank of India said the new measures exclude mortgages, car and education loans as well as gold-backed debt.
A similar measure was also announced for banks. The risk weights for credit card receivables of banks and NBFCs have been raised to 150% and 125% from 125% and 100%, respectively.
The decision comes in the wake of data indicating that the growth rate of unsecured loans is nearly double the total credit expansion. Goldman Sachs analysts said on Friday that these measures indicate that the Reserve Bank of India is “becoming increasingly cautious as these loans grow.”
![](https://techcrunch.com/wp-content/uploads/2023/11/india-loans.jpg)
Image and data: UPS
The tightening of lending partners will impact many startups, most of which rely on non-banking financial companies to provide loans to consumers. One of the fintech founders, who spoke on the condition of anonymity to avoid any repercussions, said the move would reduce growth “a little bit” and would also increase the cost of capital with which startups borrow money.
“For Paytm’s lending partners, higher funding costs and increased capital requirements will impact product profitability at BNPL/PL. They may respond by tightening credit standards and/or moderating growth from currently elevated levels,” Jefferies analysts wrote in a report.
Analysts said these measures indicate that the Reserve Bank of India is concerned about the significant growth in unsecured loans and the increasing dependence of non-banking financial companies on bank financing.
“We believe that the implementation of these measures will, at least in theory, reduce the structural return on equity in consumer lending, particularly for NBFCs due to the higher cost of funds from the banking system as well as tougher competitive intensity, as we previously explained that “Higher competition would lead to higher structural returns on equity in consumer lending.” “It means lower unit economics, slower growth and/or asset quality challenges,” Goldman Sachs analysts said.
Several lenders, including Bajaj Finance, IDFC First and SBI, which have traditionally had the highest share of unsecured personal loans as a percentage of their books, are expected to be among the worst affected.
“Over the past few years, bank financing to NBFCs in the financial sector in India has been on the rise and now constitutes more than 50% of NBFC loans. On the other hand, the borrowing ratio from mutual funds/insurance companies has seen a decline According to a previous Reserve Bank of India report, this measure has made borrowing from banks more expensive for non-banking financial companies. Goldman Sachs analysts added: “Furthermore, we believe this is likely to increase competition in alternative loan sources leading to a rise in Total cost of funds.