The common equity tier-I (CET-1) capital level of banks is seen declining by 35-100 bps following the increase in risk weights for unsecured consumer loans by RBI on Thursday.
“The actual impact would be lower as some of the NBFC exposure would be eligible for PSL and hence would carry a lower risk weight. Even after factoring in this impact, CET1 remains comfortable for most banks,” Axis Capital said in a note.
While higher risk weights will lead to some moderation in credit growth to these segments, analysts don’t expect any significant slowdown as long as credit costs remain low, and risk-adjusted returns remain healthy. Further, part of the impact is expected to be passed on by banks via higher lending rates to ensure return on capital is not adversely impacted.
“RWA for the top banks is expected to increase by 2-4 per cent based on loan mix. As a consequence, CET1 is expected to decline by 35-68 bps and CRAR by 40-70 bps. Banks are well capitalised and we don’t see impact on bank’s growth capital,” Phillip Capital said.
The brokerage firm sees a higher impact for ICICI Bank given its large exposure to NBFCs and the unsecured segment. However, the bank is well capitalised and “the decline in CET1 due to change in risk weights will not dent their growth capability,” it said.
“Our analysis indicates that the impact of the increased risk weights will likely affect RoE rather than RoA for banks,” Centrum said, adding that RBL Bank is expected to witness a 80 bps hit on RoE due to its significant exposure in the credit card business. Ujjivan and Suryoday Small Finance are also projected to see an impact of 126 bps and 193 bps, respectively, owing to their individual lending business models.
Among NBFCs, SBI Card and Bajaj Finance are seen as the most impacted given their meaningful exposure to unsecured and personal credit. CET1 impact of risk weight is estimated to be around 416 bps for SBI Card and 240 bps for Bajaj Finance, whereas for other NBFCs it is seen at around 25-85 bps.
“We have thus assumed 40 per cent of NBFC exposure (excluding HFCs) will undergo a revision in risk weight. The move will lead to a 2-5 per cent increase in RWA (risk-weighted assets) across banks,” Motilal Oswal Securities said.
The cost of borrowings for NBFCs will also go up as banks look to increase lending rates, while a higher risk weight leads to higher capital consumption, analysts said, estimating an increase of 10-20 bps in cost of funds. At present, bank borrowings form 32-65 per cent of the NBFC borrowing mix.