RBI warns lenders on top-up loan push

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.