L&T Finance tank 5% as RBI’s loan norms bite, Morgan Stanley ‘underweight’

L&T Finance Holdings (LTFH) fell more than 5 percent on November 17 morning after the Reserve Bank of India increased risk weight on consumer credit exposure of commercial banks and non-banking financial companies (NBFCs) by 25 percentage points to check the proliferation of unsecured loans.

According to Morgan Stanley, the RBI move could push up borrowing and lending rates. For NBFCs like LTFH, the impact of raised risk weights is on both sides of the balance sheet, Nomura said.

On the asset side, a hike in the risk weights on unsecured loans would have an impact on capital ratios in the range of 30-450 basis points (bps).

On the liability side, banks are the biggest source of funding and increasing the risk weights on bank exposure to NBFCs would likely make this stream of funding costlier, leading to an increase in cost of funds by around 10-30 bps.

One basis point is one-hundredth of a percentage point.

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At 12.02 pm, LTFH was trading at Rs 142.45 on the National Stock Exchange, down 4.8 percent lower. So far in 2023, the stock has rallied 58.54 percent, outperforming benchmark Nifty, which has risen gained 8.5 percent during the period.

During FY22-Q2FY24, L&T Finance recorded personal loans portfolio growth of around 3-4x.

Disclosures from the credit bureau and individual NBFCs suggest that delinquencies had gone up further in unsecured segments in Q2 FY24, especially in small loans.

The RBI’s regulatory action on risk weights on all unsecured loan categories and the sharp increase in risk weights on bank exposures to NBFCs is far stricter than expected, Nomura said.

“We view this as a clear signal from the regulator that it wants to bring down the strong growth in these segments, which is being brought into effect by bringing about an increase in the effective cost of capital for lending to these segments. To that extent, this is a clear dampener for growth outlooks for both banks and NBFC,” said Nomura.

Also Read | RBI increases risk weight by 25% on consumer credit exposure of banks, NBFCs

It can negatively impact loan growth for NBFCs in FY25F, given that around 25-30 percent of their incremental loan growth during FY22-2Q24 came from unsecured loans.

If the stress continues to rise in unsecured loans and spreads in higher ticket size categories, the credit cost trajectory for NBFCs in FY25F would be higher than historical trends and may negate the expected positive impact of repo rate cuts on cost of funds

Morgan Stanley has an “underweight” rating on LTFH. The NBFC could see most EPS cut if bank funding costs rise, the international brokerage said.

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