RBI Governor Urges Caution Over Rapid Expansion in Home and Gold Loan Top-Ups

As personal loans surge to unprecedented levels, reaching a 25% year-on-year growth to ₹54.8 lakh crore by June-end, RBI Governor Shaktikanta Das has raised red flags over the aggressive expansion in this segment. His concerns come at a time when housing loans, a significant part of this growth, have soared by 36% (18.2% excluding the HDFC merger’s impact), and unsecured personal loans have increased by 15% as of June 2024.

Das specifically warned against the rapid growth in personal loans, especially those offered as top-ups on existing home and gold loans. He pointed out that some financial institutions are not fully adhering to regulatory limits, which increases the risk of these loans being misused for speculative purposes.

This lack of compliance with regulations on loan-to-value (LTV) ratios, risk weights, and the monitoring of the end use of funds could destabilize the financial system if not addressed.

Highlighting broader systemic risks, Das cautioned that the banking system could encounter structural liquidity issues if the current trend of loan growth outpacing bank deposits continues. With retail customers increasingly drawn to alternative investment avenues, banks are struggling to attract deposits, which is leading them to rely more on short-term non-retail deposits and other liability instruments to meet the rising demand for credit.

In response to these challenges, the governor emphasized the need for banks to focus on mobilizing household financial savings. He urged banks to develop innovative products and leverage their extensive branch networks to attract deposits and secure a more stable funding base.

Das’s warnings come amid the rapidly evolving financial landscape, where the balance between credit expansion and financial stability is becoming increasingly delicate. He called on banks to reassess and refine their underwriting standards, as well as to strengthen post-sanction monitoring of loans, particularly in segments that are growing swiftly. His message was clear: while growth is important, it should not come at the expense of financial prudence and regulatory compliance.