S&P Global Ratings said on Tuesday that RBI’s increased regulatory scrutiny of lenders will on one hand improve governance and curtail exuberant lending but on the other hand might raise their cost of capital as well as slow loan growth.
Due to the worry pertaining to rising risks in the financial system, the RBI has tightened its norms with respect to unsecured loans and has also warned lenders against all forms of exuberance last year’s November. As per the Reuters report, RBI has greatly stiffened its vigilance last week to target new areas in retail lending, including mortgage-linked "top-up" loans.
In addition, the RBI has also been carrying out crackdowns on non-compliant lenders, including two non-bank firms recently. This initiative was taken due to one showcasing inadequate gold loan-related due diligence while another for deficiencies in issuing loans pertaining to the public issue subscriptions.
S&P credit analyst Geeta Chugh stated in a note, “Such actions will curtail lenders' "over-exuberance, enhance compliance culture and safeguard customers" but "could impede growth and raise the cost of capital for financial institutions."
S&P estimated that we will witness a slow down in credit growth to 14% in 2024-25 from 16% this financial year due to the increased focus on compliance, which is further coupled with the tight liquidity in the banking system.
In addition, S&P has also highlighted that stricter rules might disrupt affected entities and even dent their earnings and reputation. Also, this will increase caution among fintechs and other regulated entities.
"We expect the investors in the financial sector will seek a higher premium for the increased regulatory risk associated with their investments," said S&P. However, Fitch Ratings has showcased in a separate note that Indian banks' positive growth is likely to stay intact regardless of the pressure on margins.
Today, over the next two years amid rising funding costs, given the competition for deposits, Fitch expects banks' net interest margins (NIM) to narrow down by 10-20 basis points. Fitch also added that the banks are likely to further reconsider their investments in government securities above statutory reserve requirements with respect to loan growth.
"We expect some gap between loan growth and deposit growth to persist, implying that banks with a greater share of low-cost deposits will have the advantage."
