S&P Global credit analyst Geeta Chugh said: “India’s regulator has underscored its commitment to strengthening the financial sector.”
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Credit ratings agency S&P Global Ratings has claimed that the regulatory clampdown from the Reserve Bank of India (RBI) on several companies in the past few months is likely to limit credit growth in India in 2024-25.
It, however, said that the regulatory actions would ultimately enhance the operational resilience of the system.
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“We expect loan growth to decline to 14% in 2024-25 from 16% in 2023-24, reflecting the cumulative impact of all these actions,” the rating agency has said.
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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.
S&P Global credit analyst Geeta Chugh said: “India’s regulator has underscored its commitment to strengthening the financial sector.”
But the increased regulatory risk could impede growth and raise the cost of capital for financial institutions, she added.
The household debt to gross domestic product in India, excluding agriculture and small and midsize enterprises, increased to an estimated 24% in March 2024 from 19% in March 2019, S&P Global Ratings said.
“Growth in unsecured loans has also been excessive and now forms close to 10% of total banking sector loans,” it said.
The increased emphasis on compliance, KYC, and follow-up of processes will likely strengthen the compliance culture in India and potentially curb excessive lending practices.
S&P Global also added that these regulatory actions may lead to increased compliance costs for the sector. This may curb the ability of smaller companies to compete in the market.
“In our view, smaller and weaker companies may need to increasingly rely more on originate and distribute models, leveraging co-lending and direct assignments,” said Chugh.
It is to be noted that in March, RBI asked JM Financial Products Ltd to stop financing against shares and debentures, and also imposed a ban on IIFL Finance Ltd on originating or securitising gold loans.
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