India’s central bank curbs consumer loans to hurt startups

India’s central bank has implemented several measures to cool the high growth of consumer credit in a move that will affect consumer spending and many startups in the South Asian market, industry executives said.

Raised the Reserve Bank of India risk weight in unsecured personal loans, credit cards, consumer durable loans from banks and non-banking financial companies (NBFCs) from 25% points to 125%. The new measures exclude loans, loans for purchase of vehicles and education as well as debt backed by gold, the RBI said.

A similar move has also been announced for banks. It increased the risk weights for credit card receivables for banks and NBFCs to 150% and 125% from 125% and 100%, respectively.

The decision comes in the wake of data showing that the growth rate of unsecured loans is almost double the overall credit expansion. The moves show that the RBI has “become more cautious on the growth of these loans,” Goldman Sachs analysts said on Friday.

Image and data: UBS

The tightening of lending partners will affect many startups, many of whom rely on NBFCs to provide consumer loans. A fintech promoter, who spoke on condition of anonymity to avoid any repercussions, said the move would reduce growth “a little bit” and also increase the cost of capital where startups borrow money.

“For Paytm’s lending partners, higher funding costs and increased capital requirements will impact BNPL/PL’s product profitability. They may respond by tightening credit standards and/or moderating growth from current high levels,” Jefferies analysts wrote in a report.

The moves suggest the RBI is worried about the heavy growth in unsecured loans, and increased reliance of NBFCs on bank funding, analysts said.

“We believe that the implementation of these measures, at least in theory, will reduce the structural ROE of lending to consumers, especially for NBFCs at a higher cost of funds from the banking system as even with tighter competition, as we previously emphasized that higher competition means lower economic units, slower growth and/or asset quality challenges,” Goldman Sachs analysts said.

Several lenders including Bajaj Finance, IDFC First and SBI which traditionally have the highest share of unsecured personal loans as a percentage of their own books are expected to be among the worst affected.

“In the last few years, bank funding to NBFCs in the Indian financial sector has been on the rise, and it now accounts for >50% of NBFC borrowings. On the other hand, the proportion of borrowings from mutual funds/ insurance companies are shrinking. In the first RBI commetnary, this prompts their action which, in turn, will make borrowing from banks more expensive for NBFCs. Moreover, we believe that this is also likely to increase the competition of alternative sources of borrowings pushing up the overall cost of funds,” Goldman Sachs analysts added.

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