What changed
RBI observed that some banks were sanctioning loans to high net worth individuals for acquiring KVPs, with a 10% margin from the borrower and 90% funded by the bank, followed by pledging the KVPs. The circular explicitly prohibits banks from granting any loans for acquiring or investing in small savings instruments, including KVPs.
What it means for you
Banks must immediately cease all lending for KVP purchases, as these loans merely shift existing bank deposits into small savings instruments rather than generating new savings. This directive reinforces the original intent of small savings schemes to encourage thrift among small savers, not to facilitate leveraged investments by wealthy individuals.
What you must do
- Stop sanctioning any new loans for acquisition of KVPs or other small savings instruments immediately.
- Review existing loan portfolios to identify and report any such loans, and ensure no further disbursements under these facilities.
- Communicate this prohibition to all lending teams and branches to prevent future non-compliance.
- Acknowledge receipt of this circular to your respective Regional Office.
Who it affects
Regional Rural Banks, High Net Worth Individuals seeking leveraged investments in small savings instruments, Bank lending and credit departments
Does this ban apply to all small savings instruments or only KVPs?
The circular explicitly prohibits loans for acquisition of or investment in all Small Savings Instruments, including Kisan Vikas Patras.
What was the typical loan structure that RBI found problematic?
Borrowers brought in 10% of the face value as margin, and banks funded the remaining 90% as a loan, with the KVPs pledged as collateral.
Why did RBI consider these loans problematic?
Such loans do not promote fresh savings; they merely shift existing bank deposits into small savings instruments, undermining the objective of encouraging thrift among small savers.