MPC Meeting 2024: RBI Wary Of Growth In Top-Up Loans By Lenders

Reserve Bank of India Governor Shaktikanta Das, in his monetary policy address, said that it has observed that home equity loans or top-up loans provided by banks and non-banking financial companies have been growing at a brisk pace. These loans are also being offered by lenders on other collateralised loans like gold loans.

However, the regulator has now observed that regulatory practices are not being followed by some lenders, especially with regards to loan-to-value ratio.

"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. I repeat certain entities," Das said in his monetary policy address.

Since such practices of dolling out top-up loans lead to funds being deployed for either unproductive or speculative purposes, it is important to take steps. Hence, RBI has advised all lenders to review such practices and take remedial action accordingly.

India's Monetary Policy Committee, led by RBI Governor Shaktikanta Das, kept the benchmark repo rate unchanged at 6.5% for the ninth straight meeting. It also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.

RBI's data shows that bank credit deployment to housing and loans against gold jewellery has been rising year-on-year. As of June, 2024, the bank credit towards housing stood at Rs 27.9 lakh crore, up 36.3% year-on-year.

For loans against gold jewellery too, the bank credit deployment stood at Rs 1.23 lakh crore as of June 2024, up 30.4% year-on-year.

Das also pointed out despite pre-emptive measures of increasing risk-weights on unsecured personal loans, certain segments are still witnessing high growth.

"Excess leverage through retail loans, mostly for consumption purposes, needs careful monitoring from macro-prudential point of view," he said in his address.

Credit growth in segments like 'credit card' outstanding, though declining, has still remained high at 23.3% in June 2024, compared with 34.2% in November 2023, the RBI said.

Hence, the regulator has asked all lenders for a careful assessment and calibration of underwriting standards as well as post-sanctioning monitoring of such loans.

While pointing out other risks, Das said that alternative investment avenues are now becoming more attractive for retail customers. Due to this, banks are facing challenges on the funding side as deposit growth is lagging credit growth.

"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," he said.

In order to protect the banking system from structural liquidity issues, the regulator has asked banks to focus more on mobilisation of household savings. This can be done through several products and offerings and by leveraging the branch network of banks.

Additionally, pointing out a recent global IT outage, Das asked all lenders and financial institiutions to build appropriate risk management frameworks in their IT, Cyber security and third-party outsourcing arrangements to maintain operational resilience.