Hi everyone,

Welcome to the 130th edition of The Pattern, a weekly where we dive into the latest from the world of economy, technology and finance. Let’s get started.

When it rains, it pours

While heavy rains thrash down the streets of Bangalore and have almost paralyzed the city, the metaphorical storms still linger above the financial capital Mumbai. India’s banking and financial services industry is going through stormy weather.

As chronicled in the last edition , many banks are struggling to keep up with the rising cost of funds and the concurrent asset quality concerns which are forcing them to keep aside additional funds as provisioning in case loan quality dips and they’ve to book losses.

This week, more bad news poured in. First, an analyst report suggests that NBFCs and microfinance lenders are likely to see muted growth in the coming quarters due to stress in the unsecured lending books.

ICRA, in a report said that borrowers might find it difficult to repay debts on time due to the impact of rising interest rates. This may have a direct impact on the portfolio health of these unsecured credit providers, the rating agency said.

The rate of slowdown in growth is expected to be between 10% to 12% for NBFCs while for microfinance institutions, the impact could be larger – to the tune of 19% to 21%, according to the report.

“The NBFCs in unsecured and digital lending will face a higher squeeze in funds compared to others as slower credit growth often results in weaker borrows falling behind in their repayment schedule, increasing the pressure on asset quality for lenders,” said AM Karthik, senior vice president, financial sector ratings at ICRA.

The slowdown is expected to also spill over to other secured loan buckets too due to the overall impact on borrowers’ paying capacity, ICRA said.

And the signals have started to pour in.

On Tuesday, rating agency CRISIL published a report which suggested that the regulatory changes introduced by the RBI could impact the growth of gold loans. Gold loans have been on a rocketship trajectory lately with lots of old and new players raking in the moolah. However, this gold rush might be about to stop.

The RBI recently released a circular where it cautioned lenders against excessive exuberance and advised them to fix their processes when it comes to disbursing gold loans. The regulator highlighted lots of concerns including -

1. Deficiencies in monitoring loan-to-value ratio

2. Asset classification for overdue accounts

3. Branch operations and disbursal practices

4. Inadequate due-diligence

5. End-use monitoring and more..

The CRISIL report suggests that once the lenders start working on these areas and fix their practices – they might see a slowdown in the loan book growth because of higher scrutiny and better standards.

“The regulations aim to ensure consistent application of guidelines in the gold-loan space and protect borrower interest. Adherence is likely to impact disbursements over the next few quarters and taper gold loan growth both for banks and NBFCs.

That said, NBFCs are expected to adapt to the regulatory measures impacting their business within a reasonable timeframe, just as in the recent past, when limits were placed on cash disbursals,” said Malvika Bhotika, Director, CRISIL Ratings.

There’s no silver lining here except the fact that perhaps regulatory intervention might cause short-term pain for long-term gain. We’ll have to see how that rolls but for now, banks are preparing war chests for the long winter ahead. Reports suggest that even private lenders are cutting down on operating expenses , postponing branch expansion and reducing IT budgets to offset the potential impact of credit losses.

Truly testing times ahead.

This is all for this week. As always, leaving some reading recommendations below.

Reading List

1. Mudra loan limit doubled to Rs 20 lakh in line with Budget announcement

2. Microfinance institutions should refrain from reckless lending: DFS Secretary

3. MFI loans decline 2.3 pc in June qtr, NPAs rise: Report

4. Sluggish capex, war on pricing dragged loan growth in Sep quarter: Union Bank CEO

5. Hot India private credit market faces risks as exuberance grows

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to always get all updates.

Cheers,

Mayank

All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.