India's central bank is stepping up its fight against "exuberance" in retail lending, targeting new areas including mortgage-linked "top-up" loans, on concern about rising risks to the financial system.
The Reserve Bank of India (RBI) is tightening its supervision of the industry and nudging individual lenders to rein in credit in areas where it sees increased risks, although it has not taken any formal enforcement action, the sources with direct knowledge of the process told.
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, essentially a shot across the bow for financial firms, 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 is following a four-step approach on supervision now - monitor, warn, penalise and then act..
Credit extended by India's banks has been rising about 16% annually, more than double the economy's scorching 7.6% forecast growth for the financial year ending this month, despite 2.5 percentage points of RBI interest-rate hikes over the past two years. 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.
The RBI is now closely monitoring mortgage top-ups. They are meant to fund home improvements or additions, but banks are advertising them for expenses such as weddings, vacations and business expansions. One can take a top-up of a home loan and start investing the share market or use it for consumption purpose. That could potentially be a source of risk in terms of repayment.
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.
