RBL Bank sees minimal impact on margins despite RBIs increased risk weight on unsecured lending

Despite having the highest credit card portfolio in terms of retail assets at over 42 per cent, private sector lender RBL Bank does not anticipate a significant impact on its margins following the Reserve Bank of India's (RBI) decision to increase the risk weight on unsecured lending. The RBI increased the risk weight on unsecured consumer loans by 25 percentage points to 125 per cent and to 150 per cent for credit cards on November 16, citing a substantial rise in unsecured lending and delinquencies. Analysts had estimated that this move would raise capital costs for banks by at least Rs 84,000 crore.

Impact on RBL Bank

RBL Bank's chief executive and managing director, R Subramaniakumar, stated that the bank's capital CET 1 ratio cost will increase by 60 bps due to the RBI's action, but the impact on its margin will be minimal, at only 1-2 bps. As of Q2 FY24, the bank's capital adequacy ratio stood at 15.15 per cent, excluding Q2 FY24 profit, and its net interest margin was 5.54 per cent. Its credit cost was 47 bps, which, according to Subramaniakumar's own admission, will rise to at least 107 bps with the higher risk weighting. Given the substantial 60 bps increase in its credit cost, Subramaniakumar's comments on the margin impact are surprising, especially when compared to the nation's largest lender, SBI, which expects its credit cost to rise by 10-12 bps and the impact on its margin to be 3-4 bps, despite having a much lower exposure in percentage terms to its total assets of over Rs 33 lakh crore.

Subramaniakumar mentioned that RBL Bank has Rs 18,572 crore in credit card outstanding as of Q2 and has made provisions that exceed the regulatory mandate, thus avoiding any negative impact. He also highlighted that the credit card book is profitable but did not disclose the absolute amount. With a credit card AUM of Rs 18,506 crore, the bank holds the highest position in the industry. Its total retail portfolio was only Rs 44,092 crore, which grew by 35 per cent in Q2, during which the bank reported a net income of Rs 331 crore. This indicates that the credit card book constitutes over 42 per cent of the bank's total retail exposure.

Addressing Attrition Rates

Subramaniakumar acknowledged that the bank previously faced one of the worst attrition rates in the industry, approaching 40 per cent, which spiked after the bank nearly collapsed in late 2021. However, he stated that much of the problem has been contained, and in Q2, the attrition level decreased by almost 8 per cent to around 30 per cent.

Risk Weight Hike on Consumer Credit

The RBI circular stated that it has been decided to increase the risk weights in respect of consumer credit exposure of commercial banks outstanding as well as new, including personal loans, but excluding housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery, by 25 percentage points to 125 per cent. The new regulations, however, will not be applicable to housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery.

A higher risk weight means that lenders need to set aside more funds as a safety net for consumer loans, which could make such credit more expensive. It also restricts banks' lending capacity as they have to set aside more funds for solvency. A similar raise has been effected in the case of credit card receivables, as per the circular, on regulatory measures towards consumer credit and bank credit to non-banking financial companies too. As a result, the risk weights on credit card exposures now have been increased by 25 percentage points to 150 per cent and 125 per cent for banks and NBFCs, respectively.

Impact on the Banking Industry

The immediate impact of the enhanced risk weights is the excess capital that banks would now require. According to SBI Research, the banking industry needs Rs 84,000 crore of excess capital. Global rating agency S&P has estimated that the credit cost on the system will be 60 bps higher. Unsecured personal loans and credit card debt have risen by 26 per cent in the 12 months ending September 2023. Unsecured loans constitute about 9.8 per cent of total loans in the banking system as of September 2023.

While the RBI's decision to increase risk weights on unsecured lending aims to address the substantial rise in unsecured lending and delinquencies, it remains to be seen how banks will adjust their strategies in response to this regulatory change. RBL Bank, despite having the highest credit card portfolio, seems confident that the impact on its margins will be minimal. However, the overall impact on the banking industry, in terms of capital requirements and credit costs, is likely to be significant.