Mumbai: The Reserve Bank of India has asked banks and non-banks to monitor home equity loans and top-up loans to ensure borrowers don’t spend the money on speculative trading or other purposes that could make repaying difficult.
Governor Shaktikanta Das, in a statement issued after the announcement of RBI's June monetary policy on Thursday, observed that borrowers were using top-up loans in unproductive segments or for speculative purposes.
“Home equity loans, or top-up housing loans as they are called in India… have been growing at a brisk pace. Banks and NBFCs have also been offering top-up loans on other collateralised loans like gold loans,” said Das.
“It is noticed that the regulatory prescriptions relating to loan to value (LTV) ratio, risk weights and monitoring of end use of funds are not being strictly adhered to by certain entities.”
Home equity loans or top-up loans are additional loans taken on existing home or personal borrowings.
For instance, if a customer had borrowed ₹40 lakh to buy a house worth ₹60 lakh, and the value of the house had increased to ₹70 lakh after a few years and ₹25 lakh of the outstanding amount has been repaid, banks can consider offering a top-up loan.
Typically, these loans are intended for home-improvement purposes.
But banks have been giving these loans also for meeting other expenses such as weddings, vacations and repaying existing loans, prompting the warning from the central bank.
While the proportion of top-up loan to the overall loan book is small, analysts expressed concerns on the growth in such advances.
In the case of Shriram Housing Finance Ltd, top-up loans add up to ₹7,073.7 crore out of its total assets under management of ₹1.43 trillion.
“This is not the first time that top-up loans have come under RBI scrutiny. Earlier in March this year, too, such loans were in RBI’s crosshairs,” said Adhil Shetty, chief executive of, BankBazaar.com. “RBI has been very clear even then that it wants to give entities a chance to course-correct and act when warranted.”
“There are a number of cases where the money was used for stock market speculation and eventually lost, making repayment difficult,” he added.
Das in his statement also reiterated concerns about the high growth in certain segments of personal loans like credit card outstanding.
According to RBI data, growth in ‘credit card outstanding’, despite falling, remained high at 23.3% in June. It was 34.2% in November.
RBI had been cautioning banks on increased lending to the unsecured segment since March 2023. Personal loans grew as demand for credit increased in the post-covid era, led by segments such as small-ticket loans, gold loan and credit cards.
These segments had seen a growth of 33% on average for the past couple of years, more than double the 12-14% growth in credit, according to data from RBI.
In November, RBI increased risk weights on unsecured loans and exposure to NBFCs, which made banks set aside larger amounts of capital on such assets.
“Excess leverage through retail loans, mostly for consumption purposes, needs careful monitoring from macro-prudential point of view. It calls for careful assessment and calibration of underwriting standards, as may be required, as well as post-sanction monitoring of such loans,” said Das in his statement.
On Thursday, Mint reported that lenders had started seeing stress in the unsecured loan portfolio in the first quarter.
Credit costs, or the amount of provisions that banks have to take to make up for loan losses, rose sharply for most banks owing to higher non-performing assets, or loans turned sour, in their credit card and personal loan portfolios.
Das also cautioned banks against using short-term non-retail deposits and other instruments of liability to meet their incremental credit demand, as retail customers park money in other investment avenues.
He urged banks to focus on mobilisation of household financial savings through innovative products and by leveraging on their vast branch network.
“It is observed that alternative investment avenues are becoming more attractive to retail customers and banks are facing challenges on the funding front with bank deposits trailing loan growth,” Das said.
“As a result, banks are taking greater recourse to short-term non-retail deposits and other instruments of liability to meet the incremental credit demand. expose the banking system to structural liquidity issues.”
