RBI scrutiny may affect lenders' capital costs, loan growth, warns S&P Global

RBI regulatory scrutiny: The Reserve Bank of India's (RBI) intensified regulatory oversight of lenders is expected to enhance governance and rein in excessive lending practices, but it may also elevate their cost of capital and decelerate loan growth, cautioned S&P Global Ratings on Tuesday.

Last November, the RBI tightened regulations on unsecured loans and cautioned against "all forms of exuberance," expressing concerns about escalating risks to the financial system. According to Reuters, the central bank has ramped up its surveillance efforts, particularly targeting new areas in retail lending, including mortgage-linked "top-up" loans.

In recent actions, the RBI has cracked down on non-compliant lenders, including two non-bank firms, one for inadequate due diligence related to gold loans and another for deficiencies in issuing loans for public issue subscriptions.

Geeta Chugh, S&P credit analyst, noted that while such measures will curb lenders' exuberance, enhance compliance culture, and safeguard customers, they could also hinder growth and elevate capital costs for financial institutions.

S&P projected a slowdown in credit growth to 14 per cent in 2024-25 from the current financial year's 16 per cent, attributing it to increased regulatory compliance and tight liquidity in the banking system.

Moreover, the stricter regulations may disrupt affected entities, instill caution among fintechs and other regulated entities, and potentially impact their earnings and reputation, S&P cautioned.

"We expect investors in the financial sector to demand a higher premium for the increased regulatory risk associated with their investments," S&P emphasized.

However, Fitch Ratings offered a contrasting view, suggesting that Indian banks' profitability is poised to remain resilient despite margin pressures.

Fitch anticipates a narrowing of banks' net interest margins (NIM) by 10-20 basis points over the next two years due to rising funding costs amid fierce competition for deposits.

Banks are likely to redirect their investments in government securities above statutory reserve requirements towards loan growth, Fitch added.

"We expect some divergence between loan growth and deposit growth to persist, indicating that banks with a higher share of low-cost deposits will maintain an advantage."

(With Reuters inputs.)