Uniqus Point of View
Our assessment of the above directive of the RBI is as follows:
01. The RBI does believe that lending to certain asset classes could potentially result in elevated credit losses in the future, to cushion the impact of which, capital levels are being raised with immediate effect. Each lending institution will immediately need to assess the incremental capital which they may need basis the product profile of their lending book
02. In addition to maintaining higher capital, regulated entities have also been required to review their extant sectoral exposure limits for consumer credit and put in place limits under various sub segments
03. It will be interesting to note how the RBI view on potential stress in the consumer credit exposure plays out vis a vis the Ind AS numbers which will be reported by NBFC’s in the coming periods. Assuming the RBI belief of potential stress in the consumer credit exposure is accurate, considering that NBFC’s follow the Expected Credit Loss (ECL) approach for provisioning, one should expect to see an uptick in provisioning amounts as the same should also factor in forward looking data / outcomes for provision determination. This will potentially offset the incremental capital which the lending institution may require by applying higher risk weights for prescribed asset classes
04. Generally, one would expect to see enhanced / greater focus on underwriting for incremental lending to asset classes prescribed by the RBI. This area may expect to see greater involvement from the Board / Risk Management Committee. This could potentially also be an area of regulatory supervision by the RBI on a go forward basis
05. Whilst the outcome of the above activities will play out in the future, it would not be unrealistic to assume that one may see some slow down in consumer credit lending due to the requirement to now maintain higher capital (potential impact on cost of lending increasing and hence the borrowing being non affordable for the consumer) and introduction of Board approved limits / sub limits. This will also have a broader economic impact such as the consumer durables business, which are dependent on consumer borrowings to fund purchases
