India’s stricter regulations to pull down FIs’ loan growth and raise costs

Loan growth is expected to register a 16% decline in 2024.

Recent measures by India’s financial regulator will enhance compliance culture and better safeguard customers– but will also lead to higher capital costs for financial institutions (FIs)

"India's regulator has underscored its commitment to strengthening the financial sector," said S&P Global credit analyst Geeta Chugh. "But the increased regulatory risk could impede growth and raise the cost of capital for financial institutions."

S&P expects that the Reserve Bank of India’s (RBI) new measures will lead loan growth to decline 14% in 2025 and 16% in 2024.

Recent measures include restraining IIFL Finance Ltd. and JM Financial Products Ltd. from disbursing gold loan and loans against shares respectively; and asking Paytm Payments Bank (PPBL) to stop onboarding of new customers. 

Earlier in December 2020, the RBI had suspended HDFC Bank from sourcing new credit card customers after repeated technological outages.

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These actions are a departure from the historically nominal financial penalties imposed for breaches.

"Governance and transparency are key weaknesses for the Indian financial sector and weigh on our analysis. The RBI's new measures are creating a more robust and transparent financial system," Chugh noted. "We believe that increased transparency will create additional pressure on the entire financial sector to enhance compliance and governance practices.”

Whilst the increased transparency will reinforce compliance culture and help fortify the institutional framework of the sector, in the near term FIs also face higher compliance costs. This may curb the ability of smaller companies to compete in the market.

“We expect the regulatory actions to drive banks and finance companies to better focus on policies and processes, ultimately enhancing the operational resilience of the system,” Chugh said.

“In our view, smaller and weaker companies may need to increasingly rely more on originating and distributing models, leveraging co-lending and direct assignments," she added.