L&T Finance Holdings Dips Over 5% as RBI’s Risk Weight Hike Sparks Concerns

On the morning of November 17, L&T Finance Holdings (LTFH) witnessed a decline of more than 5 percent, driven by the Reserve Bank of India’s decision to elevate risk weights on consumer credit exposure for commercial banks and non-banking financial companies (NBFCs) by 25 percentage points. This strategic move aims to curb the proliferation of unsecured loans in the financial landscape.

Morgan Stanley indicates that the RBI’s decision could potentially lead to an increase in borrowing and lending rates. The impact on NBFCs, including LTFH, is expected to be felt on both sides of the balance sheet, as noted by Nomura.

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On the asset side, the heightened risk weights on unsecured loans are anticipated to impact capital ratios within the range of 30-450 basis points (bps). This shift in risk assessment can significantly influence the financial health of NBFCs.

Conversely, on the liability side, where banks play a crucial role as a major source of funding for NBFCs, an increase in risk weights on bank exposure is likely to elevate the cost of this funding stream. This adjustment could result in a rise in the cost of funds by approximately 10-30 bps, affecting the overall financial dynamics for NBFCs.

As of 12:02 pm, LTFH was trading at Rs 142.10 on the National Stock Exchange, reflecting a 5.08 percent decrease. In the year 2023, the stock has demonstrated a notable rally, surging by 58.10 percent, outperforming the benchmark Nifty, which has witnessed an 8.5 percent gain during the same period.