RBI’s measure to increase risk weights on unsecured consumer loans by 25 percentage points is expected to lead to some moderation in credit growth and eventually a rise in lending rates as banks’ capital requirements rise, State Bank of India Chairman Dinesh Kumar Khara said.

“Whatever we were doing, we will continue to do but there will be moderation,” Khara said at the sidelines of FIBAC 2023, organised jointly by FICCI and IBA.

Interest rate hike

“If my cost of funds are going up, I will definitely increase the interest rates. We have to do the calculation (on the quantum of increase), but RWA (risk-weighted assets) means that the capital allocation goes up, so there is a capital cost. Naturally, there will be an impact,” he said.

He expects margins to see a hit of 2-3 bps this quarter but added that more clarity will only come next quarter as the new risk weights were introduced in the middle of this quarter.

The head of another private sector bank said that the rise in lending rates will be in line with the additional capital needs of each bank and thus could rise by up to 50–60 bps.

“Higher capital means higher pricing,” said KVS Manian, Whole Time Director at Kotak Mahindra Bank, adding that lending rates for banks could go up by around 25 bps.

However, Kotak Bank already has high buffers for its unsecured portfolio, owing to which additional capital requirements are not a concern for the bank, and the bank does not see a need to go slower on unsecured lending.

“Pricing is not the only reason for calling it (loan growth) exuberant; it’s also that banks can put on assets too fast. That’s what may also be termed exuberance,” he said, referring to the RBI Governor’s remarks on the need to avoid exuberant lending.

Capital requirements

Citing market reports, Khara said that the additional capital requirements of banks are estimated to be around 60 bps or so, which seems manageable given that most lenders are sitting on some amount of “cushion” or buffers.

“And there will be some plough back in the normal course of business, which will also give them capital,” he said, adding that most lenders also have robust credit and risk assessment processes in place.

“This was something that was seen in BNPL, or instant loans, where there was no assessment of credit. And that was leading to a growth of 30 per cent plus, which was clearly overrated,” he said, calling the measure a “very thoughtful” decision by the central bank.

This is also reflected in the fact that segments such as home loans and vehicle loans, which are a necessity or create assets, were kept out of the purview of these norms.

On its part, SBI continues to have robust due diligence and effective control mechanisms on the ground, he said, highlighting that the gross NPA ratio for the state-owned bank’s retail portfolio, including unsecured, is below 0.7 per cent.

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