INSUBCONTINENT EXCLUSIVE:
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.