 "Reserve Bank of India, RBI")
The regulatory clampdown from the Reserve Bank of India (RBI) on several companies in the past few months is likely to limit credit growth in India in 2024-25, according to credit ratings agency S&P Global Ratings. It said that the regulatory actions would ultimately enhance the operational resilience of the system.
“India’s regulator has underscored its commitment to strengthening the financial sector,” 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.”
In its latest commentary, the agency said, “We expect loan growth to decline to 14 per cent in 2024-25 from 16 per cent in 2023-24, reflecting the cumulative impact of all these actions.”
“Stricter rules may disrupt affected entities and increase caution among fintechs and other regulated entities. Additionally, the RBI’s decision to raise risk weights on unsecured personal loans and credit cards aims to constrain growth,” it said.
Bans and restrictions
In March, RBI asked JM Financial Products Ltd to stop financing against shares and debentures. During the same month, it imposed a ban on IIFL Finance Ltd on originating or securitising gold loans.
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Before that, the central bank had barred Paytm Payments Bank from accepting new customers, deposits and credit transactions.
In November 2023, Bajaj Finance Ltd was banned from financing under ‘eCOM’ and ‘Insta EMI Card’. In September 2022, Mahindra & Mahindra Financial Services Ltd was disallowed the recovery or repossession through outsourcing arrangements. And in December 2020, a ban on business-generating IT applications and sourcing of new credit card customers was imposed on HDFC Bank.
Risky lending practices
S&P Global Ratings said that the household debt to gross domestic product in India (excluding agriculture and small and midsize enterprises) increased to an estimated 24 per cent in March 2024 from 19 per cent in March 2019.
“Growth in unsecured loans has also been excessive and now forms close to 10 per cent of total banking sector loans,” it said. “The increased emphasis on compliance, know-your-customer (KYC), and follow-up of processes will likely strengthen the compliance culture in India and potentially curb excessive lending practices.”
The ratings agency also added that these regulatory actions may lead to increased compliance costs for the sector. This may curb the ability of smaller companies to compete in the market. “In our view, smaller and weaker companies may need to increasingly rely more on originate and distribute models, leveraging co-lending and direct assignments,” said Chugh.
