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The spate of tough regulatory actions from the Reserve Bank of India to rein in lenders’ “overexuberance”, enhance compliance culture and safeguard customers would raise the cost of capital and moderate loan growth to 14% in 2024-25 from 16% this year, S&P Global Ratings said on Tuesday.
While the regulator’s actions reflect a “serious commitment” to improve governance and transparency at finance companies and banks, the rating agency flagged that the drawback of this drive will be higher capital costs for institutions.
The rating major cited the RBI’s recent moves to restrain certain lending by IIFL Finance and JM Financial Products, as well as the onboarding of new customers at Paytm Payments Bank, and said they are a departure from the “historically nominal financial penalties imposed for breaches”.
“Governance and transparency are key weaknesses for the Indian financial sector and weigh on our analysis. The RBI’s new measures are creating a more robust and transparent financial system,” said S&P Global credit analyst Geeta Chugh. “But the increased regulatory risk could impede growth and raise the cost of capital for financial institutions,” she added.
In a commentary titled ‘India’s Regulatory Clampdown May Raise The Cost Of Capital’, the rating major said: “In our view, the RBI has diminishing tolerance for non-compliance, customer complaints, data privacy, governance, know-your-customer (KYC), and anti-money laundering issues.”
While this is likely to lead to increased compliance costs for lenders and may curb the ability of smaller players to compete, it will also potentially curb excessive lending practices, the rating firm said.
“Household debt to GDP in India (excluding agriculture and small and midsize enterprises) increased to an estimated 24% in March 2024 from 19% in March 2019. Growth in unsecured loans has also been excessive and now forms close to 10% of total banking sector loans,” it pointed out. The RBI raised risk weights on unsecured personal loans and credit cards to “constrain” growth.
“Combined with tight liquidity, the RBI’s new measures are likely to limit credit growth in fiscal 2025 (year ending March 2025). We expect loan growth to decline to 14% in fiscal 2025 from 16% in fiscal 2024, reflecting the cumulative impact of all these actions,” it concluded.
Noting that finance companies are also vulnerable to confidence sensitivity, S&P Global said investors are likely to seek a higher premium for the increased regulatory risk, potentially affecting valuations in the sector. “We expect the funding cost for the system could rise and potentially lead to longer lending processes for lenders,” Ms. Chugh said.
