Not just risk to banks, RBI’s curbing unsecured lending to rein in shady recovery practices too

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The RBI notification said the decision was taken in the context of the warning which RBI Governor Shaktikanta Das flagged in his speech on 6 October, that there was high growth in certain components of consumer credit, and his advice that banks and NBFCs put in place safeguards to address this growing risk.

Another concern within the RBI and the finance ministry regarding unsecured loans was the increase in unscrupulous recovery practices being employed by collection agents hired by the lenders.

Unsecured loans are those types of loans that do not require the borrower to provide any sort of collateral to avail them. Such loans, as measured by the RBI, are those taken for the purchase of consumer durables, “other” personal loans such as those for domestic consumption, medical expenses, travel, marriage and other social ceremonies, and loans to repay other debts. Credit card usage is also considered an unsecured loan.

These are unlike housing loans, some kinds of education loans, vehicle loans, and loans secured by gold and gold jewellery — all of which were exempted from the RBI’s Thursday notification.

Despite the RBI’s warnings, the growth of unsecured credit has continued unabated in India.

As of September 2023, RBI data shows, the growth of outstanding unsecured personal loans stood at 25 percent compared with September last year. This is in comparison to 17 percent and 7 percent growth in loans to the agriculture sector and industry, respectively.

“This micro-prudential regulatory tightening (done Thursday) is designed to slow the offtake of growth in this segment,” Saugata Bhattacharya, a veteran economist with decades of experience in the banking sector, explained.

“Banks and NBFCs will need more capital against these loans, and will try to pass on this additional cost to borrowers via higher interest, which will presumably result in lower demand from borrowers.”

Also Read: Penal action against wilful defaulters will continue even if they enter into deals with lenders, RBI clarifies

Unscrupulous lending & recovery on the rise

In October last year, the RBI had issued a circular to all its regulated entities (REs), reminding them of the rules related to the proper behaviour of loan recovery agents employed by them. The instructions were quite clear.

The RBI said the REs must ensure that their agents do not “resort to intimidation or harassment of any kind, either verbal or physical, against any person in their debt collection efforts”.

Such acts included those “intended to humiliate publicly or intrude upon the privacy of the debtors’ family members, referees and friends, sending inappropriate messages either on mobile or through social media, making threatening and/or anonymous calls, persistently calling the borrower and/or calling the borrower before 8 am and after 7 pm for recovery of overdue loans, making false and misleading representations, etc”.

Despite these rules being in place and the RBI’s reminder, these unscrupulous practices have continued and even increased, a senior official from the central bank told ThePrint, adding that this pushed the RBI to levy several fines on banks and NBFCs in the recent past.

“The growth of unsecured lending by banks and NBFCs is, of course, becoming something of a concern from the financial stability point of view, but there’s also a growing concern in the government and the central bank about the loan recovery agents and their practices,” said the official who was involved in the investigation of such practices.

“The RBI has begun imposing significant fines on banks and NBFCs that are either breaking the rules during the time of lending, by not disclosing enough to the borrowers about their liabilities, or are outsourcing the recovery of their loans to unscrupulous agents.”

Finance minister Nirmala Sitharaman has also spoken in Parliament about this menace and the steps the government has taken to curb it.

“I have heard complaints about how mercilessly loan repayments have been followed up by some banks,” Sitharaman said in the Lok Sabha in July. “The government has instructed all banks, both public and private, that harsh steps should not be taken when it comes to the process of loan repayments and they should approach the matter with humanity and sensitivity in mind.”

RBI’s actions against errant lenders 

“It’s not just the banks doing the unscrupulous lending and recovery, but the NBFCs as well,” Sachin Chaturvedi, director general of think-tank RIS (Research and Information System for Developing Countries), and independent director on the board of the RBI, told ThePrint.

“The kind of action, for example, that had to be taken against Bajaj Finance makes it absolutely crystal clear in terms of how we need to bring in centrality of at least respectable behaviour with the borrowers.”

On Wednesday, the RBI barred Bajaj Finance from sanctioning and disbursing loans under two of its lending products for failing to provide borrowers with vital information — supposed to be included in a “key facts” document — about these products while disbursing the loans.

The central bank has also imposed monetary fines on several banks and NBFCs for not following the rules when it comes to loan recovery.

Earlier this month, the RBI imposed a fine of Rs 90.92 lakh on Axis Bank because it “made persistent calls to some of the customers” and “failed to ensure appropriate behaviour of recovery agents with some of the delinquent borrowers”.

Over the course of the February-November period, it also imposed fines on Kotak Mahindra Bank, Early Salary Services Private Limited, L&T Finance Limited, RBL Bank, and Krazybee Services Private Limited.

The offences that attracted these fines included but were not limited to failing to “ensure that recovery agents did not resort to harassment or intimidation of customers”, failing to ensure that “customers are not contacted after 7 pm and before 7 am”, failing to notify changes in penal interest rates to its borrowers “when it charged penal interest rate higher than what was communicated at the time of sanction”, and failing to put in place a system of internal audit for outsourced services such as loan recovery.

Financial risks are growing too

The quantum of credit card defaults rose to Rs 4,073 crore as of 31 March, 2023, from Rs 3,122 crore a year previously, a 30.5 percent jump in one year, according to the data reportedly obtained from the RBI through a RTI request. The latest data on defaults is not publicly available.

In his statement, Das had said the “need of the hour” was robust risk management by lenders.

“Certain components of personal loans are recording very high growth,” the RBI governor said. “These are being closely monitored by the Reserve Bank for any signs of incipient stress. Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest.”

At the time, RBI deputy governor Swaminathan J. had said the governor’s statement was only an advisory and that the RBI expected the banks and NBFCs to form the first line of defence by taking appropriate internal controls. “In case, we do not see internal controls playing out, then we will examine,” he had added.

The actions taken on Thursday suggest the internal controls were inadequate.

“This is a serious sign of concern about how banks are lending and with the quantum of loans multiplying,” Chaturvedi explained to ThePrint. “Now we find more and more ‘red lines’ being crossed, so it’s a big concern.”

“I think governance is required both on the limits that the RBI has already defined, but also in preventing this kind of lending taking the banking sector back to the NPA (non-performing asset) troubles it has just resolved with great difficulty,” he added.

(Edited by Nida Fatima Siddiqui)

Also Read: Banks’ home loan portfolios set to feel the stress. RBI must devise measures

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