India’s new regulatory measures to moderate loan growth

It will enhance compliance and safeguard customers, S&P said.

India’s newest regulatory measures may moderate the strong loan growth of Indian finance companies in exchange for better compliance and security.

The Reserve Bank of India (RBI) has recently decided to raise risk weights on unsecured personal loans and loans to finance companies, reported S&P Global Ratings.

This is aimed at constraining loan growth and reducing interconnectedness between banks and finance companies, the ratings agency said.

"We anticipate recent actions by the Reserve Bank of India (RBI) will curtail lenders' overexuberance, enhance compliance, and safeguard customers," said S&P Global Ratings credit analyst Geeta Chugh.

Retail loans held by banks and finance companies in India may triple by 2030, which will drive household leverage to 34% by fiscal year 2031 from the expected 23% in end-2024, says S&P.

Following the RBI’s actions, Chugh now expects the growth of rated private sector finance companies to decline to an average of 18% in fiscal 2025, from 20% in fiscal 2024.

The banking sector’s loan growth is expected to grow at a slower pace, at 14%. On a positive note, Indian lenders' strong underwriting will support asset quality, Chugh said.

This is because Indian lenders lend out primarily to low-risk customers and generally low loan approval rates.

“The finance companies' loan book is unseasoned. Strong economic growth has supported retail repayment capacity,” Chugh said.