Loan growth to decline to 14 per cent in 2024-25
BBN Bureau
Mumbai: Regulatory cleansing initiated by the Reserve Bank of India in several financial entities a couple of months ago may stun the credit growth in India in the coming fiscal year 2023-24, according to the global credit rating agency S&P Global Ratings.
“This could lead to a rise in the cost of funds for financial institutions, ultimately resulting in slow economic growth,” said an analyst with the agency.
In its latest estimates, the agency states: “We expect loan growth to decline to 14 per cent in 2024-25 from 16 per cent in 2023-24, reflecting the impact of all these actions.”
“Stricter rules may disrupt affected entities and increase caution among fintechs and other regulated entities. Additionally, the RBI’s decision to raise risk weights on unsecured personal loans and credit cards aims to constrain growth,” it added.
In March, the Reserve Bank issued an order to JM Financial Products Ltd, directing it to stop financing against shares and debentures. Similarly, RBI asked IIFL Finance Ltd to desist from originating or securitizing gold loans.
Previously, the Central Bank directed Paytm to halt the service of accepting new customers, deposits, and credit transactions. In November 2023, Bajaj Finance Ltd was banned from financing under ‘eCOM’ and ‘Insta EMI Card’. In September 2022, Mahindra & Mahindra Financial Services Ltd was disallowed from recovery or repossession through outsourcing arrangements. And in December 2020, HDFC Bank faced a ban on business-generating IT applications and sourcing of new credit card customers.
S&P Global Ratings points out that household debt to gross domestic product in India (excluding agriculture and small and medium-sized enterprises) grew to an estimated 24 per cent in March 2019.
“Growth in unsecured loans has also been excessive and now forms close to 10 percent of total banking sector loans,” it said. “The increased emphasis on compliance, know-your-customer (KYC), and follow-up of processes will likely strengthen the compliance culture in India and potentially curb excessive lending practices.”
The agency also suggests that these regulatory actions may lead to increased compliance costs for the sector, reducing the ability of smaller companies to compete in the market. Thus, it suggests that smaller and weaker companies may increasingly rely on the originate and distribute model, leveraging co-lending and direct assignments.
