MUMBAI: With the lenders (commercial banks) pushing top-up loans like never before, the Reserve Bank has flagged this as a potential risk for the system and asked all lenders to review such practices and take remedial action.
Top-up loans are those which a borrower can draw down over and above the existing loan. This cuts the processing and underwriting times for the lender and also for the borrower. But this unbridled loan push can create asset troubles for the system. It was same type of loan practices that spawned the 2007-08 global financial crisis, which emanated in the US, where lenders were encouraging borrowers to use their existing loan effectively as an ATM.
“Our attention has been drawn to home equity loans, or top-up housing loans as they are called, which have been growing at a brisk pace. Certain banks and non-banks have been offering top-up loans on other collateralised loans like gold loans.
“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 and such practices may lead to loaned funds being deployed in unproductive segments or for speculative purposes. Banks and non-banks are well-advised to review such practices and take remedial action,” governor Shaktikanta Das said while announcing a slew of regulatory measures as part of the monetary policy announcement on Thursday.
On the recent global software outage, which affected businesses in many countries, Das said the outage has demonstrated how a minor technical change, if it goes haywire, can wreak havoc on a global scale. It also showed the fast-growing dependence on big-techs and third-party technology solution providers.
“In this background, it is necessary that banks and other financial institutions build appropriate risk management frameworks in their IT, cyber security and third-party outsourcing arrangements to maintain operational resilience.
On the rising foreign exchange reserves, he said the external bulwark has reached a new high of $675 billion as of August 2. Overall, the country’s external sector remains resilient as key indicators continue to improve.