Using top-up loans for investments in volatile assets like equities or other speculative investments can be very risky for borrowers and increase the chances of default.
Shaktikanta Das, the Reserve Bank Of India (RBI) Governor, expressed concerns in the RBI Monetary Policy Meeting (MPC) 2024 held on August 8 about the recent growth in top-up loans, that the borrowers might be using as funds for speculative investments, especially in the stock market. The central bank has advised lenders to remain watchful and closely monitor the intended use of these home loan top-ups.
Says Das in the RBI MPC meet: “The third issue that is attracting our attention is home equity loans, or top-up housing loans as they are called in India, which have been growing at a brisk pace. Banks and NBFCs have also been offering top-up loans on other collateralized loans like gold loans. It is noticed that the regulatory prescriptions relating to loan-to-value (LTV) ratio, risk weights, and monitoring of end use of funds are not being strictly adhered to by certain entities. I repeat certain entities. Such practices may lead to loaned funds being deployed in unproductive segments or for speculative purposes. Banks and NBFCs would, therefore, be well-advised to review such practices and take remedial action.”
“While lenders are likely to be more vigilant in giving top-up home loans, borrowers should also be prudent when taking out loans. Only borrow for genuine needs or emergencies to avoid potential asset loss from excessive debt. Overborrowing can also limit your capacity to secure funds for other important necessities,” says - Chintamani Kalburge, head - operations, LoanTap, a fintech firm.
Typically, in the case of top-up loans, the end use is not defined. While these loans are often taken for specific purposes, such as house repairs and renovations, the loan amount is credited directly to the borrower's account. This contrasts with home loans, where the loan amount is directly credited to the seller's account.
Says Raoul Kapoor, Co-CEO, Andromeda Sales and Distribution, a loan distributor: “The RBI's concern is valid, as using top-up loans for investments in volatile assets like equities or other speculative investments can be very risky for borrowers and increase the chances of default.”
Says Atul Monga CEO and Co-Founder, Basic Home Loan, a fintech startup automating home loans in India: “The RBI’s apprehensions about the rise in top-up home loans signpost that borrowers need to exercise greater caution. Borrowers using these loans for projected investments, especially in the stock market, face significant risks. Such investments can lead to substantial financial losses, potentially impacting their ability to repay the loan and risking foreclosure.”
The criteria for top-up loans can get more stringent going ahead and using such loans for speculative investments is to be strictly avoided.