Indian central bank tightening consumer loans curb to impact startups

India’s central bank has imposed several measures to curb strong growth in consumer credit, a move that will impact consumer spending and many startups in the South Asian market, industry executives said.

The Reserve Bank of India has lifted risk weights on unsecured personal loans, credit cards, consumer durable loans provided by banks and non-banking financial companies (NBFCs) from 25% to 125%. The new measures exclude mortgages, loans for vehicle purchases and education as well as gold-backed debts, the RBI said.

A similar measure was also announced for banks. It increased the risk weights for credit card receivables of banks and NBFCs to 150% and 125%, from 125% and 100%, respectively.

The move follows data showing that the growth rate of unsecured loans is almost double that of total credit expansion. These measures indicate that the RBI is “increasingly wary of the growth of these loans,” Goldman Sachs analysts said on Friday.

Image and data: UBS

The squeeze on lending partners will impact many startups, most of which rely on NBFCs to provide loans to consumers. A fintech founder, who spoke on condition of anonymity to avoid repercussions, said the move would reduce growth “a bit” and also increase the cost of capital at which startups borrow money.

“For Paytm’s lending partners, higher funding costs and increased capital requirements will impact product profitability in BNPL/PL. They could respond by tightening credit standards and/or moderating growth from currently elevated levels,” Jefferies analysts wrote in a report.

These measures suggest that the RBI is concerned about the skyrocketing growth in unsecured loans and the increased dependence of NBFCs on bank funding, analysts said.

“We believe that the implementation of these measures will, at least in theory, reduce the structural ROEs of consumer loans, particularly for NBFCs, due to the higher cost of funds of the banking system as well as an intensity stricter competitive framework, as we pointed out previously that increased competition would lead to stronger competition. This means weaker unit economics, slower growth and/or asset quality issues,” Goldman Sachs analysts said.

Many lenders, including Bajaj Finance, IDFC First and SBI, which traditionally hold the highest share of unsecured personal loans as a percentage of their own portfolios, are expected to be among the worst hit.

“Over the past few years, bank financing of NBFCs in the Indian financial sector has increased and now constitutes over 50% of NBFC borrowings. On the other hand, the share of borrowing from mutual funds/insurance companies is declining. According to an earlier commentary from the RBI, this motivated their action which, in turn, would make borrowing from banks more expensive for NBFCs. Additionally, we believe it would likely also increase competition among alternative sources of borrowing, which would increase the overall cost of funds,” the Goldman Sachs analysts added.

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