RBI crackdown on personal loans – Bajaj Finance, IIFL, Aditya Birla and SBI Cards to take a bigger hit, say analysts

• Unsecured personal loans account for 37% of Bajaj Finance’s loan book, while it is at 21% for Aditya Birla Capital and it is 27% for IIFL (standalone).
• Tighter norms may impact Paytm’s break-even timelines if there is a slowdown in loan disbursals.
• Aditya Birla Finance and IIFL may need to infuse capital after the November 16 tightening of capital norms by RBI.
  

Reserve Bank of India’s crackdown on personal loan disbursals by banks and non-banking finance companies will have a cascading effect on the sector. But the worst hit will be non-bank players as they will be hit on both asset and the liability sides. While they will have to pay higher rates while borrowing from banks and bond markets, they will also have to pass on higher costs to borrowers. This will slow down the rapid growth in their balance sheet, which has been driven by rapid growth in the disbursement of unsecured personal/consumer loans.

According to analysts, non banking finance companies like Paytm and Bajaj Finance would be most affected by RBI’s move to tighten capital norms on unsecured loans and also loans disbursed to non banks. This will not only make lending more expensive for non banks but in many cases will also force them to raise more capital ahead of schedule. SBI Cards, Bajaj Finance, IIFL and Aditya Birla have relatively higher proportion of unsecured loans on their portfolio and, therefore, tighter capital norms will impact them the most. Unsecured personal loans account for 37% of Bajaj Finance’s loan book, while it is 21% for Aditya Birla Capital and it is 27% for IIFL (standalone), according to Jefferies.

According to Jefferies, SBI Cards can see an estimated.400 basis points cut in its Tier 1 capital adequacy ratio while Bajaj Finance can see 220 basis point hair cut to Tier 1 CAR. However, both NBFCs are well capitalised and have higher return on equity (low capital consumption).

“IIFL (standalone entity) and Aditya Birla Capital can see a 50-80 bps haircut to Tier 1 capital, which can lower their Tier 1 to 13%/15%. IIFL may need to infuse capital in the standalone entity; at ABFL, next phase of capital raise may get advanced,” the global investment bank said in a report. in funding costs. SBI Cards faces highest drag on Tier I CAR and highest dependence on bank-funding.

The tighter norms will not impact NBFCs but even fintechs like Paytm. Loan disbursals by fintechs will also slow down from the current levels as they may find it hard to raise funds and even pass on higher cost loans to consumers. Japanese investment bank Nomura says in a report, that in the past 18 months, nearly 25%-30% of incremental growth for NBFCs has come from unsecured retail. Any moderation in unsecured credit for NBFCs will hence have an impact on both growth and profitability for NBFCs in our view. Moreover, the regulatory action comes at a time when credit costs in these segments have started to inch up.

For Paytm's lending partners, higher funding costs and increased capital requirements will affect product profitability in the buy-now-pay-later and personal loans segments. Non bank lenders like private banks may also start to improve their underwriting standards after this which will impact overall growth.

Jefferies says: “We also watch out for the pricing environment and ability of Paytm to pass-through hike in funding costs. In our base case earnings, we forecast consumer loan disbursal growth to normalise from 90% in FY24 to 40% in FY25 and 35% in FY26. Any additional 10 percentage point slower disbursal growth (vs. base case) in FY25/26E can lead to 5-10% impact on lending revenues and ~2-3% impact on overall contributions, which may impact break-even timelines as well. Paytm may be able to compensate for this through faster ramp-up of its merchant financing business.”

ALSO READ: The dark truth behind RBI’s crackdown on easy personal loans