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Informist, Thursday, Aug 8, 2024

--RBI Das: Top-up loans growing at a brisk pace 

--Some players not adhering to norms on top-up, gold loans 

--Only some lenders are not following norms for top-up loans
--No systemic problem on following norms for top-up loans
--Asking bks to proactively monitor end-use of top-up loans
--Dealing with some entities bilaterally on top-up loan issue

MUMBAI – Some entities are not adhering to norms on home equity loans, known as top-up housing loans in India, which has warranted the attention of the central bank, Reserve Bank of India Governor Shaktikanta Das said while detailing the outcome of the third Monetary Policy Committee meeting for 2024-25 (Apr-Mar) today. The brisk growth rate of such loans also needs to be monitored, he said. 

"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," Das said. 

Typically, individuals seeking home loans opt for the maximum loan amount permissible based on the loan-to-value (LTV) ratio when initially securing the loan. Over time, as the property's value appreciates, there is an opportunity to access additional funds. Lenders commonly offer a home loan top-up when the property's value increases, enabling borrowers to qualify for a higher loan amount on the same property within the LTV limits.

Conversely, those who initially borrowed a lesser amount can apply for a top-up loan as long as the LTV difference permits it. Das highlighted that certain banks and non-bank finance companies have been offering top-up loans on other collateralised loans like gold loans. He warned that such practices may lead to the loaned funds being deployed in unproductive segments or for speculative purposes, like the equity markets. 

"Banks and NBFCs (non-bank finance companies) would, therefore, be well-advised to review such practices and take remedial action," Das said. Even in such stable financial sector conditions, the emphasis cannot shift away from proactive identification of potential risks and challenges, if any, he said. 

In May, the regulator ordered all non-banking finance companies to adhere strictly to the cash loan limit of 20,000 rupees. The move followed RBI's action on IIFL Finance Ltd, where the regulator found some disbursal and collection of loans in cash was far in excess of the statutory limit, in addition to other issues, due to which it barred the company from sanctioning and disbursing gold loans. 

Speaking at the post-policy press conference, the RBI governor said that the risk is not system-wide but is limited to certain entities. He urged banks to closely monitor the end-use of top-up loans disbursed by them. Das also said that the central bank is dealing with some entities bilaterally on the issue.  End

Reported by Kabir Sharma

Edited by Tanima Banerjee

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