Expressing concerns over home equity loans or top-up housing loans growing at a “brisk pace”, the Reserve Bank of India (RBI) has asked banks and non-bank lenders to exercise caution in offering such credit facility to borrowers. In a post monetary policy review statement, RBI Governor Shaktikanta Das said that “certain entities” are not following regulatory guidelines, causing risks of such loaned funds going to “unproductive” or “speculative” purposes.
Das said the issue that is “attracting our attention is home equity loans, or top-up housing loans as they are called in India, which have been growing at a brisk pace. Banks and NBFCs have also been offering top-up loans on other collateralised loans like gold loans.”
What is a home equity loan and top-up housing loan?
A home equity loan refers to borrowing money using the equity in your home as collateral. Equity here means the current worth of your property, minus the amount of any existing loan on your property. While a top-up home loan allows a borrower to gets an additional credit that can be availed of over and above the existing loan.
Also read: RBI keeps repo rate unchanged at 6.5% – How can homebuyers reduce their interest burden?
The RBI governor further said that 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.”
Top-up loans are being deployed in unproductive segments or for speculative purposes?
Such practices may lead to loaned funds being deployed in unproductive segments or for speculative purposes. Banks and NBFCs would, therefore, be well-advised to review such practices and take remedial action, Das cautioned banks and NBFCs.
Raoul Kapoor, Co-CEO, Andromeda Sales and Distribution Pvt Ltd, said, “Typically, in the case of top-up loans, the end use is not defined. While these loans are often taken for specific purposes, such as house repairs and renovations, the loan amount is credited directly to the borrower’s account. This contrasts with home loans, where the loan amount is directly credited to the seller’s account.”
The RBI’s concern is valid, as using top-up loans for investments in volatile assets like equities or other speculative investments can be very risky for borrowers and increase the chances of default, Kapoor added. “This can also lead to an increase in non-performing assets (NPAs). Therefore, lenders should be very vigilant about the intended use of top-up loans and may need to establish a mechanism to ascertain the actual use of these loans once they are disbursed to the borrower.”
Anil Gupta, Senior Vice Presidentc Co Group Head – Financial Sector Ratings, ICRA Ltd, said, “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 raises concerns on overleveraging but, it also raises suspicion on the quality of such borrowers, as they may also use such top-up loans to service the existing loans.”
Also read: Stable home loan interest rates to boost homebuyers’ sentiment: Realty Consultants
In his briefing post monetary policy announcements on Thursday, the RBI Governor also touched upon other regulatory issues pertaining to sanctioning of other credit options like personal loan.
It is observed that the sectors in which pre-emptive regulatory measures were announced by the Reserve Bank in November last year have shown moderation in credit growth, Das said.
“However, certain segments of personal loans continue to witness high growth. Excess leverage through retail loans, mostly for consumption purposes, needs careful monitoring from macro-prudential point of view. It calls for careful assessment and calibration of underwriting standards, as may be required, as well as post-sanction monitoring of such loans,” the RBI chief noted.