RBI regulatory actions to aid financial sector

S&P Global Ratings on Tuesday said that Reserve Bank of India’s (RBI) intensified regulatory oversight of lenders will enhance governance and rein in excessive lending.

RBI’S measures include restraining IIFL Finance and JM Financial Products from disbursing gold loans and loans against shares, respectively, and asking Paytm Payments Bank Ltd (PPBL) to stop onboarding of new customers.

Earlier, it had suspended HDFC Bank from sourcing new credit card customers after repeated technological outages.

In November last year, it implemented stricter regulations concerning unsecured loans and cautioned lenders about excessive risk-taking, citing concerns of growing risks to the financial system.

“India’s regulator has underscored its commitment to strengthening the financial sector,” said S&P Global credit analyst Geeta Chugh.

RBI’S commitment will improve governance and transparency at finance companies and banks, it said. 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”.

The intensified emphasis on compliance and tight liquidity in the banking system will slowdown the credit growth to 14 per cent in FY25, down from 16 per cent this fiscal year.

Stricter regulations may disrupt affected entities, raise caution among fintechs and other regulated entities, and potentially impact their earnings and reputation, according to the agency.

“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.

“We expect the funding cost could rise and potentially lead to longer lending processes for lenders,” Chugh said.

However, Fitch Ratings said in a separate note that Indian banks’ profitability is likely to stay “resilient” despite the pressure on margins. It anticipates a contraction of 10-20 bps in banks’ net interest margins over the next two years due to escalating funding costs amidst intensified competition for deposits.

STRICTER REGULATIONS may disrupt affected entities, raise caution among fintechs and other regulated entities, and potentially impact their earnings and reputation, according to the agency.