Shares of L&T Finance Holdings (NS: LTFH ) tumbled by over 5% today after the Reserve Bank of India (RBI) decided to increase the risk weight on consumer credit exposure, affecting commercial banks and non-banking financial companies (NBFCs) like LTFH. The regulatory action, which hikes the risk weight by 25 percentage points, is anticipated to significantly impact NBFCs both in terms of capital ratios and borrowing costs.
Morgan Stanley (NYSE: MS ) reacted to the news by assigning an "Underweight" rating to LTFH. Analysts predict that the new measures could affect LTFH's capital ratios by 30-450 basis points and lead to a rise in the cost of funds by about 10-30 basis points. This outcome stems from the fact that NBFCs primarily rely on banks for funding, and the increased risk weight will likely make this source of finance more costly.
The move by RBI comes at a time when LTFH reported a substantial growth in its personal loans portfolio between FY22 and Q2FY24, with an expansion of approximately 3-4 times. Despite this growth, there was a noted increase in small loan delinquencies during Q2 FY24. The central bank's tightened regulations aim to moderate the robust expansion in unsecured lending segments. Consequently, this could dampen the loan growth for NBFCs in FY25F, considering that about 25-30% of their incremental loan growth from FY22 to 2Q24 has been driven by unsecured loans.
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