RBI is discussing expanding what it defines as overlay or top up lending which involves offering credit that is over and above any collateral offered by a customer. As desired by the RBI, in November 2023 the carrying value of top-up loans which are given by banks against depreciable security had to be categorized as unsecured loan for credit assessment and exposure.
In the RBI’s “Trend and Progress of Banking 2023-24” report, the RBI discussion on top-up loans emphasized the still requires further action to address risks linked to other types of top-up loans. The central bank stated that the periods of turbulence in the stock market could make the securities used as collateral for these loans property, automobiles or gold and thus make it risky for the providers of loans.
Top up loans therefore permit customers to borrow incrementally on the basis of existing securities, although the RBI noted that banks may have considered such loans to be less risky. Consequently, these loans are granted without much rigor and instead by employing low credit standards, and poor compliance with sound norms on LTV ratios. So LTV means the amount of loan given against the value of the asset. The RBI underlined that some lenders do not control the intended use of the funds, and this enhances risks.
The RBI has also recently tightened credit norms for all non-fund based facilities such as personal loans, credit card outstanding, etc., because of high incidence of default. Whereas urban co-operative banks have a measure limit of unsecured credit, the scheduled commercial banks (SCBs) and non-banking finance companies (NBFCs) have their measure limits, which are very much relaxed and touch over the roof in some cases. The RBI appealed to such institutions not to be hasty in opting for such limits to avoid adversely impacting the institution’s balance sheet.
It shows that percentage of unsecured loan out of total credit from SCBs has been rising continuously since March 2015.
