The RBI Governor Shaktikanta Das once again highlighted the heightened risks in the unsecured lending segment and advised lenders to exercise caution when it comes to extending personal loans for consumption purposes. How significant do you think this concern is?
Keki Mistry: Sometime in November last year, RBI had voiced concern about unsecured loans. At that time, they had increased the risk weight on those loans by 25% and we have seen that the growth of unsecured loans in the system has come down from 30% plus to around 23-24%. So, there has been an impact. Now, RBI is seeing something which all of us or some of us are not seeing. Maybe there are some companies, maybe there are some banks, maybe there are some NBFCs, there is some concern that RBI has noticed in its inspection and therefore is giving some kind of a forewarning to the banks that be careful when you give these kinds of loans.
Typically, after a part of the loan has been paid back, say after two, three, or four years, let us say the original amount is Rs 1 lakh and it has come down to Rs 70,000 because of repayment. Then, the individual comes up and says, can I have a top-up loan? So, the security of the property is already lying with the lender and the customer comes and says, against that security, because my outstanding loan has come down, give me an additional amount. Now, that additional amount is not monitored very closely in terms of how it is used. So, my sense is RBI’s concern emanates from the fact that that additional amount which has been taken against the house is being used for perhaps consumption, perhaps for some unproductive purposes, perhaps for investment in stock markets. We do not know what the concern is, but that to my mind seems to be the concern.
As far as concerns go, to a certain extent, it does seem valid. But from everything that you are pointing out in the way that it is working, but with the RBI tightening norms, could getting a home loan top-up become that much more difficult? What kind of impact could this have on the growth of the home loan segment for banks?
Keki Mistry: In my opinion, the quantum of top-up loans in the system – I am talking from my HDFC experience – was extremely minuscule. The reason is that if you are lending money to a typical middle-income customer who by nature is a very conservative individual, he will never want to go and borrow more money just because there is security and he can go and borrow money. It usually does not happen like this.
Now, maybe with some segment of the market, maybe with the self-employed customers who may be using the additional amount they borrow for their businesses, it might be happening. So, that is where the concern is. I do not think it slows down the growth of housing loans in the system at all, not at all. But those people who are taking these top-up loans because they paid part of the loan and now there is additional security against which they can borrow money, there might be some constraint on them. Now, what RBI will do, we do not know. Maybe they will increase the risk weight on the top-up loan component. I do not know how it will work.
Typically the RBI watches the situation for some time and then comes out with measures; we will see how that works this time. The governor has also emphasised the need for lenders to carefully monitor personal loans after the loans have been disbursed and to ensure rigorous assessment. Calibration of underwriting standards is also something that he pointed out. Could this kind of due diligence potentially increase the overall cost for lenders?
Keki Mistry: No, to the best of my knowledge from whatever little I have seen with some of the banks or even Poonawalla Fincorp or some of the other NBFCs that I know of, very good and systematic diligence is carried out before a loan is disbursed. Now, it is possible that with some particular entity, maybe RBI has noticed in its inspection that the diligence is not being carried out that systematically. It is possible and maybe this is a sort of intimation to those entities. But by and large, in the system, I do not think diligence is not being done properly. I think diligence has been done very carefully by and large. It is a very important thing. You have to do diligence. Without a proper diligence, you are taking a risk on the entire loan.There is no taking away from the fact that diligence is an important piece in the entire banking system. But does the increasing trend right now in the personal loan segment, does it indicate a shift in consumption patterns or do you think this could be a sign of some underlying concerns in the economy at this stage?
Keki Mistry: I think it is a shift in consumption trends. We have to understand what these personal loans or loans against properties or those kind of loans are being given for. There are different purposes. You could be borrowing money against a property for your business purpose, You want to put more capital into your business or you want to make more investment into your business and whoever is lending you money will say, give me a security. So, you give a property as a security and could be one aspect. Another aspect and this is very common in the Western world is that you could be borrowing money for consumption. You could be borrowing money to buy things to put into your house or for some kind of revenue expenditure. In the Western world, it is very common for people to take a loan and then go on a holiday with the money that they get and then pay it back over time. We have not seen that in India. I do not think the Indian mindset is such that people will borrow money in a big way for consumption. Yes, it may be happening in a few cases, but I do not think it is a widespread sort of thing in India. But in the Western world, it is very rapid.