RBI’S clampdown on banks, NBFCS may lead to higher cost of capital: S&P Global

THE REGULATORY clampdowns by the Reserve Bank of India (RBI) on some banks and non-banking financial companies (NBFCS) will improve compliance culture and safeguardcustomers,butmayresult in higher capital costs for financial institutions, S&P Global Ratings said in a report.

In the past few months, the RBI’S measures include restraining IIFL Finance Ltd. and JM Financial Products Ltd. from disbursing gold loan and loans against shares respectively; and askingpaytmpaymentsbankltd. (PPBL) to stop onboarding of new customers. Earlier in December 2020, the RBI suspended HDFC Bank from sourcing new credit card customers after repeated technological outages.

These actions are a departure from the historically nominal financial penalties imposed for breaches. "India's regulator has underscored its commitment to strengtheningthefinancialsector. But the increased regulatory risk could impede growth and raise the cost of capital for financial institutions,” said Geeta Chugh credit analyst S&P Global in a report on Tuesday.

Combinedwithtightliquidity, the RBI'S new measures are likely to limit credit growth in fiscal 2025. The agency expects loan growthtodeclineto14percentin fiscal 2025 from 16 per cent in fiscal 2024, reflecting the cumulative impact of all these actions. Stricterrulesmaydisruptaffected entities and increase caution among fintechs and other regulated entities. Additionally, the Rbi'sdecisiontoraiseriskweights on unsecured personal loans and credit cards aims to constrain growth, she said.

In November last year, the RBI increased the risk weights on the exposure of banks towards consumer credit, credit card receivablesandnbfcsby25percentup to 150 per cent. Risk weight refers to the capital banks keep aside as provisioningtocoveranyloandefaults. The S&P Global said it expects the regulatory actions to drive banks and finance companiestobetterfocusonpoliciesand processes, ultimately enhancing the operational resilience of the system.however,thisshiftislikely to lead to increased compliance costs for the sector. This may curb the ability of smaller companies to compete in the market.

In a separate report called Economicoutlookasia-pacificq2 2024-S&pglobalratingssaidthe Indian economy is likely to grow at6.8percentinthefinancialyear 2025 driven by strong domestic demand and pick up is exports, S&P Global said in a report.