After expressing concerns over the outlier growth in personal loans, Reserve Bank of India governor Shaktikanta Das on Thursday raised red flags about the high growth in top-up loans. The governor said some entities are not adhering to regulatory guidelines and asked lenders to monitor the end use of funds as borrowers may be channelling funds into unproductive segments or speculative activities.
“It is noticed that the regulatory prescriptions relating to loan to value ratio, risk weights and monitoring of end use of funds are not being strictly adhered to by certain entities,” said Das while announcing the monetary policy. “Such practices may lead to loaned funds being deployed into unproductive segments or for speculative purposes. Banks and NBFCs would, therefore, be well-advised to review such practices and take remedial actions.”
His concerns about top-up loans came after the RBI hiked risk weights on unsecured loans by 25 percentage points in November.
However, the governor clarified that surge in top-up housing loans is not a system-wide issue, but confined to a few entities. “Regulatory requirements in top-up housing loans are not being followed by certain entities and it is not a system-level problem.” Such cases are being dealt at the supervisory level bilaterally, Das said.
A top-up loan allows an existing borrower to borrow more funds without pledging any additional collateral. Monitoring of end use of funds will reduce the risk of overleveraging, said experts.
“With increased activity levels in the top-up loan segment, RBI’s caution to lenders on calibrating underwriting norms and closer monitoring of the end-use is a step in the right direction. Such loans not only raise concerns about overleveraging, but also fuels suspicion on the quality of such borrowers, as they may use top-up loans to service existing loans,” Anil Gupta, senior vice president, co-group head – financial sector ratings, ICRA.
The central bank also reduced the frequency of reporting by banks to credit information companies (CICs) from once a month to once a fortnight. The move will benefit borrowers as their credit information will be updated faster and will bring in more transparency and promote a healthy credit culture.
“It is proposed to increase the frequency of reporting of credit information on a fortnightly basis or at shorter intervals,” said Das. “Consequently, borrowers will benefit from faster updation of their credit information, especially when they repay loans. The lenders, on their part, will be able to make better risk assessments of borrowers.”
Terming the decision as a very progressive move, experts say this will significantly strengthen the credit information ecosystem.
“With more frequent data reporting by banks and credit institutions, CICs will be able to update credit records faster and this will translate into more updated data being available for making informed lending decisions by credit grantors,” said Rajesh Kumar, MD & CEO, TransUnion CIBIL. “This will also help in resolving consumer disputes faster based on updated data in the credit records.”
