'Some players are not...': RBI governor Shaktikanta Das red flags top-up home loans

The Reserve Bank of India (RBI) on Thursday expressed concerns over the growing trend of top-up home loans, highlighting that some lenders are not adhering to regulatory guidelines.  "Home equity loans have been growing at a brisk pace. However, some players are not adhering to norms on top-up and gold loans. Banks and NBFCs will be advised to take remedial action," RBI governor Shaktikanta Das said while keeping the repo rate unchanged at 6.5%.

These loans, originally intended for home improvements, are increasingly being marketed for non-productive uses such as weddings, vacations, and business expansions.

Das pointed out that the rapid growth in home equity loans, particularly those offered as top-ups on other collateralized loans such as gold loans, poses significant risks. 

The central bank is urging individual lenders to tighten credit in these areas to prevent potential financial instability.

In a bid to mitigate these risks, the RBI had recently called on banks to conduct rigorous audits on algorithm-based lending models. These models, which use various indicators from cash-flows to home addresses, facilitate near-instantaneous loan approvals. However, the central bank insists that these models must be properly tested and validated to ensure their reliability and accuracy.

The RBI had also advised some shadow banks and small finance banks to cap the growth of loans made through co-lending agreements at 20%. These agreements, which allow banks to jointly lend to individuals and spread credit risk, have come under scrutiny due to their rapid expansion.

Data from the central bank shows that unsecured personal loans surged by 21% at the end of January compared to the previous year. This uptick underscores the need for caution and more stringent oversight in the lending sector.

The RBI also emphasized the importance of banks focusing on the mobilization of household financial savings, rather than aggressively pushing for top-up loans. By ensuring adherence to regulatory prescriptions regarding loan-to-value ratios and the end-use of funds, the RBI aims to safeguard the financial system from potential disruptions.