The Reserve Bank of India (RBI) said on Thursday that some banks and non-banking finance companies are not adhering to loan-to-value ratio norms and monitoring the end use of funds, citing 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' rate, Shaktikanta Das, governor of the RBI, stated that certain entities are not strictly adhering to regulatory prescriptions relating to the loan-to-value (LTV) ratio, risk weights, and monitoring of the end use of funds.
Home equity loans, often known as top-up house loans in India, have been rapidly expanding. According to Das, banks and non-bank financial companies (NBFCs) have been providing top-up loans on other collateralized loans, such as gold loans. As a result, he suggested that these institutions examine their current practices and implement corrective measures. Top-up loans are extra credit that borrowers can obtain in addition to their current house or personal loans.
The RBI raised the risk weights on bank loans to NBFCs and unsecured consumer loans in November of last year. Since risk weights were raised, the overall growth in consumer loans in the affected industries has reduced, falling from 23.3 percent in November 2023 to 13.9 percent in June 2024. Concurrently, within the same time frame, bank loans to NBFCs decreased from 18.5 percent to 8.2 percent.
Even so, credit growth for unsecured personal loans, such as "credit card outstanding," continued to be strong, falling from 34.2 percent in November 2023 to 23.3 percent in June 2024. "From a macro-prudential point of view, excessive leverage through retail loans, primarily for consumption purposes, needs careful monitoring," stated Das.
Bankers claim that a detailed evaluation of top-up loans will reveal which types of homeowners are receiving this type of financing. "Compared to seasoned loans where a significant portion of the principal has been paid, the top-up given to new home-loan borrowers with a high principal component is more vulnerable to pressures," a senior executive from a public sector bank stated.
"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," highlighted Suresh Ganapathy, Managing Director and Head of Financial Services Research. Although the precise percentage of home equity or loan against property (LAP) is not disclosed by banks, we estimate that LAP loans will account for between 15 and 20 percent of all house loans for the majority of banks.
Das made it clear during the press conference following the monetary policy announcement that the RBI is handling top-up loans bilaterally and that the issues are not systemic, but rather the result of a trend among "certain" businesses. Das stated that Reserve Bank of India is addressing this issue bilaterally at the supervisory level with specific organizations that exhibit this problem.
Deputy Governor Swaminathan J discussed the need to reevaluate the risk weight criteria that were announced in November 2023. He stated that the RBI is keeping an eye on the incoming data since it is too soon, as it has only been two to three quarters since the increased risk weight norms were announced.
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