On the identical time, it suggested banks to repair the KYC gaps and carefully monitor gold loans and hinted that it could problem directive to ban banks from charging pre-payment penalties on floating fee loans taken by small entrepreneurs. Though banks and finance corporations have the discretion to set limits on unsecured exposures, “some entities have mounted very excessive ceilings, which have to be constantly monitored”, the RBI report mentioned.
The regulator’s worries stem from the truth that even after it raised danger weightage on unsecured loans in November 2023, unsecured loans nonetheless represent one-fourth of business banks’ books on the finish of March 2024.
The RBI added it expects “boards of regulated entities (RE) to indicate prudence and keep away from exuberance within the curiosity of their very own monetary well being as additionally systemic monetary stability”. Justifying its stance, RBI mentioned that although credit score development has dipped, “delinquency ranges and leverage warrant enhanced vigil”.
On top-up loans, the RBI identified that lenders typically sanction additional amenities to debtors with minimal processes and due diligence, generously underwrite loans, observe insufficient fund end-use monitoring, and deviate from loan-to-value (LTV) ratios and danger weights.
“The RBI will assess the necessity, if any, for extra regulatory interventions to mitigate the recognized dangers in circumstances of different top-up loans,” mentioned the regulator. The central financial institution additionally warned about malpractices within the digital lending scape whereby “unscrupulous gamers in digital lending house, who falsely declare affiliation with RE. Enhanced monitoring and transparency are required.” To mitigate this danger, the RBI is within the technique of establishing a repository of Digital Lending Apps.
On the interlinkage between banks, NBFCs and personal credit score, the RBI mentioned: “Robust interrelationship between them may give rise to systemic considerations together with the potential of regulatory arbitrage to avoid rules.” The regulator mentioned shut monitoring “is warranted as their attain expands past mid-sized company debtors”.
The RBI mentioned in its final October coverage that it could limit banks from charging prepayment penalties on floating fee loans of small businessmen to “safeguard clients’ curiosity”. At current, banks will not be permitted to cost prepayment penalty to particular person debtors for functions apart from enterprise. The RBI expressed considerations over excessive attrition in banks and finance corporations, stating that “excessive attrition poses important operational dangers, together with disruption in buyer providers and lack of institutional data”.
KYC GAPS
It additionally directed banks to repair sure gaps in know-your-customer, or KYC processes. “Accounts getting frozen and lack of proactive buyer help have brought on operational inefficiencies and buyer grievances,” the regulator mentioned. The RBI suggested banks to carefully monitor gold mortgage portfolios because it continues to watch irregularities in lending processes.