Keki Mistry on what RBI diktat on unsecured lending

Keki Mistry, Non-Executive Director, HDFC Bank, says “people are still not seeing any concern or any deterioration in terms of asset quality as far as the unsecured loans are concerned. So, to my mind, this is a precautionary measure by the RBI, a welcome precautionary measure, given that this kind of lending has increased so much in the system.”

What are your initial thoughts on this latest circular from the RBI on unsecured lending and also can you help us understand in layman terms the impact it would have on the financial sector — banks, NBFCs, all of them?

My view is that RBI for nearly two months has been continuously making some remark or comment about the fact that the quantum of unsecured lending in the system has increased a lot and RBI is a little concerned about it. One was expecting some kind of regulatory action around that. What exactly that action would be, one did not know and now we know that the risk weight on these loans has been increased by 25 percentage points.

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So, where it was 100%, it has become 125%. Where it was 125%, it has become 150%. Fortunately, to the best of my knowledge, whatever little I have known and spoken to people in the system, people are still not seeing any concern or any deterioration in terms of asset quality as far as the unsecured loans are concerned. So, to my mind, this is a precautionary measure by the RBI, a welcome precautionary measure, given that this kind of lending has increased so much in the system.

All it means is that the banks and the NBFCs will now need to provide more capital when they do these loans. Providing more capital means that the return on equity on those loans comes down to some extent, that is the implication.

But were you surprised by the move at all or would you say that the RBI has been extra cautious and has been giving out hints out there? What are your initial thoughts on the extent, the coverage and the quantum of these measures?

RBI has been talking not just of the higher degree of unsecured lending in the system, they have also expressed some concern about the amount of lending that banks are doing to NBFCs and some of these NBFCs are using the capital, the money that they get from banks for giving these kind of unsecured loans, and that is where the link comes between the banks and the lending.

I do not know whether this would apply to, for example, to a loan given to LIC Housing Finance. When a bank lends to LIC Housing Finance, LIC Housing Finance in turn does only secured lending. It does not do unsecured lending to the best of my knowledge. Therefore, logically, if we extend the logic of the circular, it would probably not apply to lending to NBFC which is giving secured loans. But again, I am sure a clarity on that will emerge in a day or two.

But the bulk of the credit growth in the last few quarters was actually coming in from consumer and retail loans, that was the area which was firing up for all of these financials which is resulting in that 20-30% kind of growth. Do you think this circular will now impair the credit growth rate and it will come off meaningfully?

To some extent, yes, the growth rate would come down because as I said, at the end of the day, a bank or an NBFC provides loans based on profitability of a product. When you determine the profitability of a product, you look at the risk involved, you look at the provisioning required, you look at asset quality in terms of past track record of non-performing loans and, of course, you look at the amount of capital you need to provide.

Now, one of these factors has changed, which is that the capital you require for giving these loans has increased and therefore, to that extent, the profitability is lower. Therefore, if the NBFCs’ profitability on a certain product is lower, their growth on that product could also possibly come down, unless you are looking at a bank or a NBFC, which is extremely well capitalised. These are signals from the RBI. I am sure that the banks and the NBFCs will pay heed and slow down some of this lending.

How would the impact be on banks? Whether it is their capital raising requirements or not, would PSU banks be hit more than private banks and NBFCs in your view?

Any bank where the capital ratio is lower, will to that extent be more impacted than banks who have a higher capital ratio. Also, barring a handful of these NBFCs, most NBFCs are today extremely well capitalised. If you look at the balance sheet and the capital ratios of many of the large NBFCs, they are very well capitalised. So, all it does is reduce the return on equity that you generate on that loan. That may make these kinds of loans a little less attractive compared to what they were in the past and it would probably slow down lending to the sector which is what RBI wants.

So, in your assessment and conversation with your peers, you are not hearing anything about asset quality issues, are you? We understand that a couple of NBFCs like Chola did raise some concern within the unsecured lending to an extent.

Well, to the best of my knowledge, based on the people that I have spoken to, I have not been given to feel by anyone that they are seeing any significant deterioration in asset quality. But, these things come with a lag. Our economy is growing so well and so strongly at the moment that the risk at this point of time could become lesser. That is probably the point RBI is making that today the risk may be lesser, tomorrow the risk would increase for whatever reason — there is a global issue, there is some geopolitical issue and the growth slows down a little bit, which I do not think will happen but as a central bank you have to look for those kinds of events.

What would be the impact on credit card players like SBI Card because there should be a bigger hit and even the platforms like Paytm because they were getting into unsecured lending?

I do not know specifically about any particular company and I do not want to comment on any particular company, but the risk weights on all these products have increased. I do not think there are any specific concerns with regard only to credit cards. It is a general concern with regard to unsecured lending.

It could possibly just mean that some of these credit card companies could increase the interest rate that they charge, could happen, I do not know, to compensate for the slower growth, a slightly marginal loss, or not loss but a marginal reduction in their profitability on these products, that is again left to each company.

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