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Risks to Indian banks may rise on higher lending: Fitch

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Risks in India's banking sector may rise as a result of the Reserve Bank of India’s recent steps encouraging banks to lend more to non-bank lenders and retail borrowers, Fitch Ratings said in a report.

While these initiatives are designed to help keep credit flowing to the real economy amid signs of a slowdown, the latest measures could push up banking-sector risk if they lead banks to accept higher credit risk than they previously had appetite for, the rating agency said. “India's constant nudging of banks to lend more to non-bank lenders is in contrast to the global trend of authorities trying to break the linkages between banks and NBFIs,” Fitch said.

“India's overarching approach across the financial system is aimed at achieving a more inclusive financial system in which bank savings can support lending to parts of the economy that are beyond the banks' distribution network or risk appetite.

However, it increases the potential of risks in the NBFI sector spilling over to banks, exacerbated by the limited capacity of India's capital markets to provide extra funding to NBFIs.” The Reserve Bank of India recently announced steps to encourage banks to lend more which includes an increase in the single-exposure limit to 20% of Tier 1 capital (from 15%); priority lending status for credit to NBFIs for on-lending to finance agriculture, small businesses and home-buyers; and a reduction in the risk weight for consumer loans (except credit cards) to 100% (from 125%). “The reduction in the risk weight for consumer loans would be positive for loan growth but negative for their overall credit profile if the extra lending is riskier than average,” Fitch says.

Non-bank lenders are under significant funding pressure as investors shy away following the default of Infrastructure Leasing - Financial Services in 2018 and Dewan Housing this year.

Disbursements have declined steeply as a result, with knock-on effects to other sectors, particularly consumption.

Reduced availability of financing has contributed to the slowdown in India's auto sector, with vehicle sales in July falling 31% yoy, according to the Society of Indian Automobile Manufacturers.




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