India’s largest lender, State Bank of India (SBI), is set to increase interest rates on personal loans in response to the Reserve Bank of India’s (RBI) decision to introduce higher risk weightings for unsecured loans. The move is expected to have a 2-3 basis point impact on SBI’s net interest margin (NIM).
SBI Chairman Dinesh Khara stated that the increase in risk weightings for unsecured loans will necessitate an adjustment in interest rates. He added that the bank will conduct the necessary calculations to determine the extent of the rate hike.
The RBI’s decision to increase risk weightings for unsecured loans from 100% to 125% and raise risk weightings for bank loans to higher NBFCs by 25 percentage points is applicable to both new and existing loans.
Khara emphasized that SBI’s strong due diligence practices have resulted in low gross non-performing assets (NPAs) of 0.7% across its retail portfolio, including the unsecured segment. However, he acknowledged that the new risk weightings will lead to a 2-3 basis point reduction in NIMs in the upcoming quarter.
SBI’s NIM for domestic operations had already declined from 3.55% in Q2FY23 to 3.43% in Q2FY24. Sequentially, the NIM fell from 3.47% in Q1FY24.
RBL Bank’s Managing Director and Chief Executive Officer (CEO), R Subramaniakumar, indicated that the new norms would impact the bank’s credit card business, despite the bank’s adequate capitalization with a CET1 ratio of 15.15%. The overall impact on RBL Bank’s business is estimated to be 60 basis points.
Subramaniakumar expressed confidence in RBL Bank’s ability to achieve its planned growth rate despite the tighter norms, stating that the bank’s profits would support its growth objectives. He also mentioned that the bank has no plans to raise capital and that its exposure to NBFCs, which will be affected by the new norms, is minimal.
Several bankers acknowledged that the RBI’s measures signal a cautious approach to unsecured lending. Hitendra Dave, CEO of HSBC India, stated that the intention is to slow down unsecured lending and make it more restrictive.
Earlier, RBI Governor Shaktikanta Das emphasized that the recent measures are aimed at sustainability and are pre-emptive in nature. He also pointed out that sectors that are major growth drivers, such as housing, vehicles, and MSMEs, have been exempted from the higher risk weightings.
Das reiterated the importance of stress-testing for banks, NBFCs, and other financial entities to ensure their resilience against potential risks.
