About two months after the Reserve Bank of India rolled out higher risk weights for certain segments of consumer credit, private banks have reported a capital impact of 30-100 bps due to the higher capital allocation requirement for these loans. However, this has not slowed down retail credit growth, including unsecured retail, during the third quarter.

Among the large banks, HDFC Bank reported the highest capital impact of 97 bps in Q3 FY24, followed by ICICI Bank and Axis Bank which saw capital being hit by 70 bps. IDFC First Bank and RBL Bank, both with high shares of unsecured retail credit saw capital being impacted by 100 bps and around 70 bps, respectively.

Even so, robust overall capital ratios, and preference for higher yielding retail assets amid muted corporate credit growth and slower deposit accretion, has led to banks posting strong growth in the retail credit segment, including unsecured retail, during the reporting quarter.

In the Q3 earnings call, Kotak Bank CFO Jaimin Bhatt said the higher risk weights are not seen “putting the brakes” on unsecured loan growth, whereas Federal Bank said that it has reviewed its pricing on personal loans and made a few changes.

Personal loans of private banks grew 10-86 per cent on year, with growth for lenders such as ICICI Bank, Kotak and Axis Bank at 28-37 per cent and for small players like IndusInd and Federal at 57-86 per cent.

Risk weights

The central bank, in November 2023, increased the risk weights on consumer credit of banks and NBFCs by 25 per cent. This largely pertains to unsecured loans, and excludes housing, education, vehicle and gold loans.

Taking the capital hit in their stride, banks said growth during Q3 was supported by the fact that the circular was introduced halfway through the quarter. While retail credit could slow down to some extent going ahead, moderation will be limited aided by banks’ ability to increase lending rates by 15-30 bps, robust portfolio quality, and the strong demand for personal loans and credit cards.

HDFC Bank CFO Srinivasan Vaidyanathan said the bank has a strong pipeline of pre-approved and eligible and high credit quality customers. The bank will continue to focus on more margin accretive segments and the share of retail loans will continue to rise, he added.

ICICI Bank said it has reviewed its NBFC portfolio and is “comfortable with the quality of the book”. Group CFO Anindya Banerjee said the bank has taken some steps to refine credit parameters from some loan segments but remains to remain robust.

Good visibility

IndusInd Bank and RBL Bank said that while growth in retail and personal loans has been accelerated, unsecured loans comprise only a small portion of their overall portfolio and thus does not pose any significant risks. Most banks said that much of their unsecured lending is to exist and partner customers, which gives good visibility on portfolio quality. Thus, consumer credit is expected to continue to grow at around 25-30 per cent for FY24 and FY25, faster than overall loan growth of 18-20 per cent.

However, a recent RBI paper said personal loans grew at CAGR of 17 per cent in outstanding amount and 15 per cent in borrower accounts between 2015 and 2023. They constituted the single largest category of bank credit at 49 per cent of total borrower accounts and 30 per cent of outstanding non-food credit as of June 2023.

The full impact of the measures is likely to be felt over another two quarters as banks realign their unsecured lending strategies. Even so, any reduction in credit supply will be minimal owing to the strong capital adequacy ratios, healthy risk-adjusted returns and decadal low NPA levels, analysts said. They added that any slowdown will only be in small ticket loans – where banks don’t have a large exposure – as both demand and supply of large ticket personal loans continues to rise.