Monetary policy: Some entities not following topup loan norms, says RBI

Credit card spend continues to see high growth despite risk weighting increase

The Reserve Bank of India (RBI) on Thursday said some banks and non-banking financial companies (NBFCs) were not following norms on topup loans pertaining to the “loan to value” (LTV) ratio and the monitoring of the end use of funds.

It highlighted high growth in credit card outstanding despite increase in risk weightings.

Observing that home-equity loans or topup housing loans were growing at a “brisk” pace, Governor Shaktikanta Das said regulatory prescriptions were not being strictly adhered to by certain entities.

“…Banks and NBFCs have been offering topup loans also on other collateralised loans like gold loans,” Das said, adding banks and NBFCs would, therefore, be advised to review their practices and take remedial action.

Topup loans are additional credit a customer can take over and above an existing personal or home loan.

In November last year, the RBI increased risk weightings on unsecured consumer loans and bank loans to NBFCs.

As a result, consumer loan growth in sectors where risk weightings were increased moderated from 23.3 per cent in November 2023 to 13.9 per cent in June 2024.

In parallel, bank credit to NBFCs declined from 18.5 per cent to 8.2 per cent during the same period.

However, credit growth in unsecured personal loans such as “credit card outstanding”, though declining, remained high at 23.3 per cent in June 2024 as compared to 34.2 per cent in November 2023.

“Excess leverage through retail loans, mostly for consumption purposes, needs careful monitoring from a macro-prudential point of view,” Das said.

According to bankers, a granular assessment of topup loans will provide information as to which kind of home borrowers are being given such credit. “The topup given to new home-loan borrowers where the principal component is high is more vulnerable to pressures compared to seasoned loans where a substantial part of principal has been paid,” said a senior executive in a public-sector bank.

Suresh Ganapathy, managing director, head of Financial Services Research, said: “The above statements from the RBI could have implications for banks in each of these areas/segments on the assets/liabilities that they are sourcing. While banks don’t disclose the exact proportion of home equity or (loans against property) loans, we believe for most banks loans against property will be 15-20 per cent of the overall home loan pie.”

During the post-monetary policy press meet, Das said the matter regarding topup loans was not systemic but a trend seen among “certain” entities, with the RBI dealing with them bilaterally.