Mortgage top-ups are meant to fund home improvements or additions, but banks are reportedly advertising them for expenses such as weddings, vacations and business expansions.
In its fight against “exuberance” in retail lending, the RBI is reportedly targeting new areas such as mortgage-linked “top-up” loans.
According to a Reuters report, the RBI is nudging individual lenders to rein in credit in areas where it sees increased risks. Mortgage top-ups are meant to fund home improvements or additions, but banks are reportedly advertising them for expenses such as weddings, vacations and business expansions.
RBI has asked banks to conduct rigorous audits on algorithm-based lending models, which use indicators from cash-flows to home address to generate nearly instantaneous approvals for personal loans. Central bank officials have asked multiple algo-based loan providers to ensure their models were “properly tested and validated”.
The RBI has urged some shadow banks and small finance banks to limit to 20% the growth of loans made through co-lending agreements, which allow banks to jointly lend to individuals to spread the credit risk, another source said.
Unsecured personal loans were up 21% at the end of January from a year earlier, central bank data shows.
Apart from mortgage top-ups, the RBI is cautioning lenders about the risks of algorithm-based credit models and nudging a few institutions to slow co-lending, the report added.
“We do not wait for the house to catch fire and then act,” RBI Governor Shaktikanta Das said in December when asked about tougher rules the bank had announced for personal loans. The central bank aims to ensure risks to the system do not escalate amid global economic uncertainty, analysts say.
“The RBI is also setting out regulatory expectations from the industry through its recent supervisory actions, which can act as a guidance for the entire sector,” said Anil Gupta, senior vice president and co-group head of financial-sector ratings at ICRA.
The RBI has taken a string of measures over the past six months to rein in some retail lending by banks and non-bank financial firms, and publicly warned them against “all forms of exuberance”.
But the new scrutiny, marks a change for the central bank, which as recently as September said India’s credit expansion did not point to building systemic stress. RBI, according to the report, is following a four-step approach on supervision now – monitor, warn, penalise and then act.
The RBI typically uses moral suasion – speeches, calls to bank executives, individual meetings – as initial steps to prod banks, before considering more assertive enforcement. The central bank in November raised risk weights on personal loans, credit cards and bank credit to non-banking firms on signs of above-trend growth in those segments. It has taken action against a two non-bank firms in the recent past, one for inadequate loan-related due diligence and the other for deficiencies in providing loans towards public issue subscriptions.
