Reserve Bank Warns Against Speculative Use of Top-Up Home Loans
New Delhi, 2024-08-09 – The Reserve Bank of India (RBI) has expressed concern over the recent surge in top-up home loans, fearing that funds are being channeled into speculative investments like the stock market. To mitigate this risk, the regulator has instructed banks to closely monitor the purpose of these loans.
In a Monetary Policy Committee meeting, RBI Governor Shaktikanta Das highlighted the rapid increase in home equity loans, stating, “These are increasing rapidly. Banks and NBFCs are also giving top-up loans on other loans like gold loans.” He expressed concern over lax practices regarding loan-to-value (LTV) ratio, risk weighting, and monitoring of fund utilization.
How Banks Respond
Borrowers often maximize their loan eligibility under the LTV (Loan-to-Value) ratio when taking out a home loan. As property values appreciate over time, they can qualify for additional funding through a top-up home loan. This option allows individuals who previously took a lower loan to access additional funds when their LTV eligibility increases.
Expert Opinions
Adhil Shetty, CEO of BankBazaar.com, believes the RBI’s directive is a targeted measure to prevent speculative practices. He clarifies that the restriction applies to a limited number of institutions.
ICICI Bank clarifies on their website that top-up home loans can be used for various purposes, including home renovation, furnishing, and personal expenses.
Rahul Kapoor, Co-CEO of Andromeda Sales and Distribution Pvt Ltd, emphasizes that the intended use of a top-up loan is not explicitly defined, but lending norms clearly prohibit their use for speculative purposes.