The Reserve Bank of India (RBI) on Thursday said some banks and non-banking finance companies are not following norms on top-up loans pertaining to the loan-to-value ratio and monitoring the end use of funds while highlighting the high growth of credit card outstanding despite an increase in risk weights.
Observing that home equity loans or top-up housing loans are growing at a ‘brisk’ pace, Shaktikanta Das, governor, RBI, said the regulatory prescriptions relating to the loan-to-value (LTV) ratio, risk weights, and monitoring of the end use of funds are not being strictly adhered to by certain entities.
“…home equity loans, or top-up housing loans as they are called in India, which have been growing at a brisk pace. Banks and NBFCs have also been offering top-up loans on other collateralised loans like gold loans,” Das said, adding that banks and NBFCs would, therefore, be well-advised to review such practices and take remedial action.
Top-up loans are additional credit that a customer can avail over and above an existing personal or home loan.
In November last year, RBI increased risk weights on unsecured consumer loans and bank loans to NBFCs. As a result, the total consumer loan growth in the sectors where risk weights were increased moderated from 23.3 per cent in November 2023 to 13.9 per cent in June 2024. In parallel, bank credit to NBFCs declined from 18.5 per cent to 8.2 per cent during the same period.
However, credit growth in unsecured personal loans such as ‘credit card outstanding,’ though declining, remained high at 23.3 per cent in June 2024 compared to 34.2 per cent in November 2023.
“Excess leverage through retail loans, mostly for consumption purposes, needs careful monitoring from a macro-prudential point of view,” Das said.
According to bankers, granular assessment of top-up loans will provide information on which kinds of home borrowers are being given such credit. “The top-up given to new home-loan borrowers where the principal component is high is more vulnerable to pressures compared to seasoned loans where a substantial part of the principal has been paid,” a senior executive from a public sector bank said.
Suresh Ganapathy, managing director, head of financial services research, said, “We believe the above statements from RBI could have implications for banks in each of these areas/segments on the assets/liabilities that they are sourcing. While banks don’t disclose the exact proportion of home equity or loan against property (LAP) loans, we believe for most banks LAP loans will be roughly about 15-20 per cent of the overall home loan pie.”
During the post-monetary policy press meet, Das highlighted that the concerns regarding top-up loans are not systemic but a trend witnessed among ‘certain’ entities with RBI dealing with them bilaterally.
“This problem is seen in certain entities and we are dealing with these entities bilaterally at a supervisory level. It is not a systemic problem,” Das said.
Speaking on the need to re-look at the risk weight norms issued in November 2023, Deputy Governor Swaminathan J said that RBI is watching the incoming data, since it is too premature as it has only been 2-3 quarters since the announcement of additional risk weight norms.
First Published: Aug 08 2024 | 6:02 PM IST
