High limits in unsecured lending a worry, says RBI – Times of India

MUMBAI: RBI has expressed concern over banks and finance companies setting high ceilings for unsecured loans, stating that it expects their boards to exercise prudence.
Noting that there has been some moderation in unsecured lending after RBI tightened norms for this segment, it said, “While specific limits have been prescribed for unsecured lending by urban co-operative banks (UCBs), the boards of commercial banks and NBFCs have discretion in fixing limits on unsecured exposures.
However, some entities have set very high ceilings, which need to be continuously monitored.”
Going forward, RBI expects the boards of regulated entities to exercise prudence and avoid exuberance in the interest of both their own financial health as well as systemic financial stability, it added. In addition to unsecured loans, RBI has also raised concerns about top-up loans on gold loans, stating they could present similar risks to unsecured loans. RBI noted that these loans “could lead to a buildup of risks, especially during times when collateral for such loans becomes volatile or faces cyclical downturns.”
In light of these concerns, RBI had instructed that all top-up loans extended by regulated entities (REs) against movable assets – which are inherently depreciating in nature – should be treated as unsecured loans for credit appraisal, prudential limits, and exposure purposes.
Another area of concern for RBI is private credit. Acknowledging the trend of shifting from formal lenders to private credit, RBI said, “A closer look is, however, warranted at the interlinkages between regulated entities, including banks and NBFCs, and such firms. Strong interrelationships between them could give rise to systemic concerns, along with the possibility of regulatory arbitrage to circumvent regulations.”