What changed
RBI observed banks sanctioning loans to high net worth individuals (HNIs) for KVPs, where the borrower put up 10% margin and the bank funded 90%, with KVPs pledged as collateral. The circular explicitly prohibits any loans for acquiring or investing in small savings instruments like KVPs.
What it means for you
Banks must cease all lending linked to small savings instruments, including KVPs, as these loans merely shift existing bank deposits into small savings rather than generating new savings. This closes a loophole used by HNIs to leverage bank funds for tax-advantaged investments, and non-compliance could invite supervisory action.
What you must do
- Immediately stop sanctioning any new loans for acquisition of KVPs or other small savings instruments.
- Review existing loan portfolios to identify and classify any such loans; ensure no further disbursements.
- Update internal credit policies and loan product documentation to explicitly exclude small savings instruments as eligible purposes.
- Communicate this prohibition to all branches and credit officers through a circular or advisory.
Who it affects
All scheduled commercial banks (excluding RRBs), High net worth individuals (HNIs) who used such loan structures, Bank credit and risk management teams
Does this circular apply to loans already sanctioned but not yet disbursed?
Yes, the circular directs banks to ensure no loans are sanctioned for acquiring KVPs or similar instruments, so any undisbursed portion of such loans should be halted immediately.
Are loans against existing KVPs as collateral also banned?
The circular specifically prohibits loans for acquisition of KVPs. Loans against KVPs already held as collateral for other purposes are not addressed in this circular.
What are the consequences if a bank continues to offer such loans?
RBI has not specified penalties in this circular, but non-compliance with regulatory directives can lead to supervisory action.