How a Supreme Court Case May Not Help either Desperate Borrowers or Prudent Savers
The Supreme Court is giving a sympathetic hearing to a segment of borrowers who are pleading for a waiver of interest during moratorium (notified for the period of the lock-down). The worry is that a Court order will fail to separate those who can pay (many borrowers have their jobs and do not need the moratorium), those who are genuinely trapped (have lost their job or livelihood and need empathy and support), and reckless borrowers who availed multiple loans without any thought or ability to pay. 
 
Unless the Reserve Bank of India (RBI), as the banking regulator and supervisor, works quickly to present the apex court with the entire spectrum of borrowers and their varying needs and circumstances, we may end up with a one-size-fits-all judgement that may probably be as messy as the one on the telecom sector with terrible consequences.
 
As far as I can see, it is the bankers’ lobby (Indian Banks Association—IBA), which represents a small part of the problem that is doing the pushing. It seems to have got support from one depositors’ group – the All India Bank Depositors Association—which is correctly concerned about banks passing on the cost of interest write-off to savers by reducing deposit rates. 
 
Here, too, senior citizens with term deposits are the most vulnerable segment, along with not-for-profits, who are only allowed to keep corpus funds in term deposits and will be the worst hit. Neither RBI, nor the IBA or depositors appear to have taken a studied or nuanced view about the problems of every segment of borrowers and the impact of waivers on savers. No effort has been made to identify reckless borrowers and rapacious lenders who ought not to reap the benefits offered to prudent borrowers and diligent savers. 
 
The buck stops at RBI and it needs to work quickly with all stakeholders. Let’s look at a few examples of borrowers in deep trouble who are not part of the discussion. 
 
The Reckless Borrowers: Call them reckless, clueless or just plain greedy; what is common in all the examples below is that they have very poor financial literacy. These are all cries for help received by Moneylife Foundation’s free credit helpline since the lock-down.
 
I have lots of debt from personal loan and credit card bill and now need help for out from this burden. My monthly income is Rs23,600 and total loan Rs8 lakh something.
 
I earn Rs52,000 per month but my existing loans and credit cards dues amount to Rs6,00,000. I have issue with CIBIL; kindly help me out.
 
I am struggling to get a loan due to bad credit score. My monthly earning is Rs1,17,000 and I have standing home loan/credit card/car loan and am not able to pay regular EMIs (equated monthly instalments). So need your support to get one loan out of three so that I will be able to pay EMI smoothly.
 
I have taken two personal loans, bike loan, and also have three credit cards and now I am unable to pay any single EMI. My salary is Rs30,000 per month and my total EMI per month is Rs50,000. In the past six months, I didn’t pay any EMI but still I am safe because of lock-down. So I am not receiving calls from banks and collection officers. I am worried about it… I want minimum Rs10 lakh for closing the all loans, credit cards and other debt.
 
My  credit score is around 400. Banks are not giving loan. I want to clear all dues because need to buy a home. So need help.
 
I have taken loan from 4 NBFCs (non-banking finance companies) amounting to Rs9 lakh & short-term loan from apps amounting to Rs1 lakh; now not able to pay because salary is less than debt. Went to lenders for increase tenure but no way. What do I do?
 
In each of these cases, there is no easy solution; but the lender and borrower are both at fault. While the borrower was reckless and financially illiterate, what excuse does the lender have for providing multiple loans without checking other borrowings or ability to repay? 
 
Lenders are in a hurry to sanction and disburse initial loans, while borrowers are clueless that the party is over after a default and continue to believe that someone will give them a bigger loan to cover the overdue amounts and consolidate loans. Such restructuring is only available to the Mallyas or Ruias who owe hundreds or thousands of crores of rupees to banks! But why should the burden be borne by prudent borrowers, diligent savers or investors of the lending institution (whose returns will be hurt by loan write-offs)?
 
The App Lenders: In many ways, it is a repeat of the microfinance story. Microfinance institutions (MFIs) came on the scene to replace the rapacious moneylenders but triggered a horrible crisis in 2010, which finally led to a committee under YH Malegam to look into issues faced by people on the ground. 
 
Until then, MFIs were being feted for their ‘last mile’ connect with impoverished rural communities. The early entrants did start with the noble intentions, but with PE (private equity) money demanding scaling of the business at any cost, it soon dwindled into an ugly morass of multiple companies luring the same borrower into accepting multiple loans, forcing them to buy insurance to earn commissions and, worst of all, charging usurious interest rates to those who have no options. 
 
The app lending story is a turbo-charged version of the same game. According to a news website, The Federal, there are over 400 app-based lenders competing to offer loans to the poorest and most needy borrowers, with superfast disbursal based only on Aadhaar-based identification. 
 
It is all so easy that a borrower can avail multiple loans before the first is reported to credit bureaus. Most start out as small loans for short tenures but quickly balloon into big repayment problems, since borrowers have very limited resources in the first place. 
 
The interest rates are usurious—well over 30% plus high processing fees, taxes and massive penal interest charged on failure to pay. Not all lenders are bad and there is a real need for credit in this segment to create a bridge to formal lenders. But there is enough of reckless lending to have turned the segment murky with ugly recovery tactics, harassment of borrowers, friends and family to force repayment.
 
On 12th June, Moneylife re-published this article in arrangement with The Federal about harassment of borrowers, often daily wagers, students and micro-businesses by app-based lenders. In my role as an activist, I brought it to the attention of the top brass at the RBI and was happy to get a quick reply that its supervision department was gathering data and looking into complaints. 
 
On 18th June, The Mint reported that RBI  “was set to issue an advisory cautioning lenders” against aggressive recovery tactics. When it is time for some decisive action, especially during a lock-down, RBI will issue an advisory! The article quotes an RBI source as saying that it does not regulate app-based lenders, although many have investments from banks and NBFCs. 
 
Remember, India has in place a Usurious Loans Act,1918 to keep borrowers out of the clutches of the moneylenders. The Act caps maximum interest charged at under 30%, but the government turns a blind eye to the fact that all microfinance, credit card and fin-tech companies are in breach of the Act, if one includes various costs, charges and fees that are levied to charge more but side-step provisions of the Act. 
 
Under this Act, the judiciary can intervene to modify the terms of the loan. In addition, 22 states have specific laws to prevent usurious lending. But the law has rarely been invoked because indigent borrowers/ defaulters have no funds to approach the legal system.
 
In 2008, four foreign banks had challenged, in the Supreme Court, an order of the National Consumer Disputes Redressal Commission, which ruled that interest charges of over 30% on credit card outstanding was unfair. At that time, RBI had refused to allow banks to hide behind the claim that the Usurious Lending Act does not apply to companies regulated by the Banking Regulation Act. But nothing has changed on the ground for borrowers who fail to clear that entire outstanding credit card due and they continue to pay anywhere over 36%. 
 
So, we have a situation where the apex court is hearing a plea on unfair interest during a moratorium; but it may neither help desperate borrowers not prudent savers, who may be impacted by the verdict. 

 

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    COMMENTS

    Sudhir Mankodi

    2 weeks ago

    You are talking of three categories of borrowers. Those whose jobs are not affected and are still in a position to pay their EMI regularly. They don\'t require any moratorium for either instalments or interest. It is the second category of borrowers who, according to the article, are at the receiving end. The purpose of the loan is very important here. In most of the cases, purpose would be to either buy two wheelers or cars or a house. And majority of such borrowers would be in the age group of 30 to 40 years. The issue is without creating sufficient safety net this group starts acquiring the assets just because loans and credit card facilities are available. This is nothing but lack of financial planning and whenever the circumstances turn in adverse way, even marginally, this is the group that suffers the most. It\'s time that the employers include \"Financial Planning\" as one of the subjects in their Corporate Induction Programme. Such a step will help this young set of employees to think of possible consequences of resorting to debts without creating sufficient safety nets which may result in disaster not only for them individually but also for their dependents. Having decided to go for loans in unplanned way, that too for luxuries of life, they can\'t claim immunity from payment of interest on the outstanding. Moratorium is also grace for them. They must understand. As regards the third category of borrowers who have availed loans without deserving them, no mercy should be shown to them. Any relaxation, even moratorium, will risk the depositors\' money and trust they have reposed in the financial institutions.

    REPLY

    kvrao42004

    In Reply to Sudhir Mankodi 2 weeks ago

    Banks are really unaware of three categories in practical terms though they are aware of this theoretically as you and me. Because today there is no data based system that will reveal such useful clues. No doubt banks focus on creditworthiness but the follow up is very poor. They don't have luxury of time and means to break their heads as to what's happening there when non repayments pile up in several accounts.

    impaddi

    2 weeks ago

    Credit ratings of individuals can be used for identifying the genuine borrowers. This may filter out the reckless borrowers. In addition RBI may look for other option like Tax returns etc also
    Blanked implementation of waiver will directly hit the savers only.

    yerramr

    2 weeks ago

    Very Right, Mrs Sucheta Dalal.
    Depositors, particularly senior citizens are deeply hurt due to very low interest rates. But this is the only way to save for a rainy day for them. This apart, lazy banking that drove the banks, particularly, PSBs and NBFCs to retail loaning has led to the debacle. There used to be a general rule with all prudent lenders in the past that the total borrowing on all counts should be within the repaying capacity - no more than 25% of his monthly earning from all sources. This rule has been forsaken in their anxiety to lend. It took at least ten years of my Officer's life to buy a frig in my house despite pressure, although loan was available for the asking from the Employees' Cooperative Society. When people borrow for acquiring retail assets like the washing machine, ACs, mixies, grinders and also take a housing loan, they are not weighing their repaying their capacity. Multiple institutions help the borrower with each institution not knowing the other has lent the borrower more than his capacity. As you rightly said, both the borrower and lender are responsible. Lending pressure on retail loans delivery is forcing many to be irresponsible lenders. CRISIL rating is not at all a good bench mark and many accounting do not touch it. If I have not borrowed at all, I am least credit worthy because there is no record of performance as a borrower. After the RBI stopped micro management and branch inspections, things have gone for the worse and this has two decades history now!! Of course, one may argue whether it has done any better than so many other internal audits, statutory audit, and other vigilantes.

    hari.krv

    2 weeks ago

    Excellent article. They will never learn!

    kvrao42004

    2 weeks ago

    A few issues: The writer has stated "RBI to present the apex court with the entire spectrum of borrowers and their varying needs and circumstances". Lenders do not have this data. Considering a huge number of loan accounts handled by them, it's impossible. RBI has never sought this information from banks though it has been asking lots of data pertaining to borrowers. When banks themselves do not have this, it's too much to expect this data from app lenders or micro finance institutions. It's like you have so many things, but what's required is not available. It's again a system issue. In view of this the apex court helplessly sought data that "one size fits all".

    As for reckless borrowers and rapacious lenders, less said the better. When lenders are rapacious, a small portion of borrowers tend to become reckless. A reckless borrower finds a foolish lender and so stretches his arm to take it. Lender has become rapacious due to the targets imposed on him. Between lenders and borrowers, please tell me who should be more careful and well organized? As for their appraisal skills and follow up, less said the better. If ever lenders have less NPAs(compared to the total loan portfolio), it's only due to the response of good borrowers.

    Finally, the writer Sucheta Madam as usual articulates all facts quite succinctly. But sorry to say that her views on this subject are not practical. Perhaps I am eligible to offer these comments since I served " Banker to the Nation"(read SBI)in a senior capacity with diverse experience. I am willing to debate on the issues raised herein , should anyone has contrary views. Submit button is not working.

    REPLY

    sucheta

    In Reply to kvrao42004 2 weeks ago

    Mr Rao, you may have served with SBI, but are you seriously saying that SBI has data on app based lenders? and all Peer2Peer lending? some of them are chinese lending companies. I am pretty sure a serious investigation will show that many are not even bothering to report to credit bureaus. Everytime there has been an issue, the RBI itself has been caught napping -- as with the microfinance issue that was brewing since 2008 but the big bust happened in 2010. I can only be amused at the assertion that SBI will have all data, when RBI has often been clueless ( you may want to look at Overseas corporate bodies of the Ketan Parekh scam fame which were also under RBI supervision - and you may have been an active banker then) so often in the past 3 decades of my journalism.

    kvrao42004

    In Reply to sucheta 2 weeks ago

    Let me confirm SBI doesn't have any data on app based lenders and Peer to Peer lending. SBI doesn't entertain credit proposals if they have such data, of course on a case to case basis. My assertion was about lack of data on borrowers varying needs and circumstances especially in personal loans. The fact of the matter is lenders at times collect too many data but do not make a sense of such heaped on them. Even after more than five decades of banking, appraisal skills of lenders and follow up system deserve thorough make up. I shall just give one example that will highlight the loophole in the system. This is on personal banking. A borrower changes his residence and does not inform his banker. As on today none will have a clue and so he can become a default borrower and his lender has to just write off. Multiply this with thousands and you will know the mess. I have flagged a brief profile in my comment only to back up its accuracy and not as a display of ego.


    FRANCISXAVIER

    In Reply to kvrao42004 2 weeks ago

    The writer has stated "RBI to present the apex court with the entire spectrum of borrowers and their varying needs and circumstances". Lenders do not have this data.
    - Is the lender didn't have the credit/repayment history (from CIBIL and other credit bureaus), income source of the borrower before loan approval? very strange !!

    sucheta

    In Reply to FRANCISXAVIER 2 weeks ago

    Well, stranger things have happened and we have written about them-- or rather I have written about them for 30 years. Nothing changes, because people react like you have -- assuming that all is well with the world!! A little alertness and assertiveness on the part of savers will help those of us who try and help. Instead people remember us when and after they have lost money!

    bkochar1506

    2 weeks ago

    The simplest approach to providing relief is to order the lending institutions can then recast these deferred installments/interest into a separate RBI COVID loan at 8% with a moratorium till 30-Sep-20 and repayable in 15 installments by 31-Dec-21.

    RBI must not just to refinance RBI COVID loan at 6% but also guarantee the repayment of these installments.

    dilipzaver

    2 weeks ago

    There are business borrowers. MSME and others. Those can be easily identified who have religiously paid their monthly interest and other bank charges. Untold it is known that they were able to do so from their monthly sales and cash flow.
    It is accepted by govt that when there is no sales during lockdown and hence there is no cash generated. The very logic reason that they can not pay the interest and other bank charges. This is exactly identical situation to what happens to farmers when no rain , floods and other calamities. Farmer’s loan is waived in such case. Here govt should at least waive the interest.

    REPLY

    Meenal Mamdani

    In Reply to dilipzaver 2 weeks ago

    How do you determine who has been a responsible borrower until the COVID 19 mess hit?
    If they were absolutely regular in their monthly payments until this, and their earnings before COVID 19 justified the loans they availed themselves of, then the govt should create a resolution mechanism where honest and prudent borrowers are being hurt. But if they have borrowed beyond their ability to pay EMI, they should not be rescued.

    kiranshah254

    2 weeks ago

    Banks are commercial entities accountable to both their depositors & shareholders & can waive interest/interest on interest only if the Govt. reimburses fully like farm waiver. It is highly amusing to see the SC dabbling in an area best left to the wisdom & empathetic approach of the Govt./banks/RBI. However,the more complex case is of credit card borrowers. RBI was already too liberal to grant moratorium on credit card outstanding where the interest rates may be in range of 30-36% p.a. plus late fees,etc. It will be nigh impossible to waive the same for banks/RBI.

    Asymmetric Deposit Accretion Creating Challenges for Small and Low-Rated Banks: Ind-Ra
    There is sudden surge in bank deposits due to a rise in overall borrowings of both the central and state governments, rather than increased savings. While deposit accretion has been strong, a shift in the profile of the banks accruing them is noticed with depositors focusing on quality and safety to differentiate between banks, says India Ratings and Research (Ind-Ra). 
     
    In a research note, the ratings agency says, "AAA rated banks in Ind-Ra’s coverage have witnessed an increase in the deposit accretion rate, both on quarter-on-quarter (qoq) and year-on-year (yoy) bases in fourth quarter (4Q) of FY20, whereas new-age private banks, regional banks and small finance banks (SFBs) have mostly slowed down. This has created a divide in the banking segment deposit rates."
     
    Though almost all banks have reduced their deposits rates, according to Ind-Ra, the slide is much sharper in the public sector and large private sector banks, creating a wider spread between the top banks and others. 
     
    "The deposit rate differential is also reflected in the large spread in marginal cost of funds-based lending rates (MCLRs) of these banks; this should help in acquiring better credits while protecting their margins once credit demand picks up. Lesser flexibility in terms of attracting deposits at lower rates implies that small and low rated banks will either face the challenge of sacrificing margins to compete with large banks or have to on-board low rated customers which will increase their risk profile," it says.
     
    During January to May 2020, aggregate deposits in the banking system grew by Rs7.05 trillion compared to Rs4.65 trillion to the same period last year. The credit growth however, as expected, remained muted. The banking system’s credit grew by only Rs2.2 trillion during January to May 2020 as against Rs2.84 trillion during January to May 2019. 
     
     
    According to Ind-Ra, the puzzling fact is that the deposit growth has been robust in spite of a massive rise in cash in circulation, which is leakage in the deposit base. It says, "Pursuant to the nationwide lockdown which stalled most of the economic activities, cash in circulation has risen strongly by around Rs3.5 trillion during the first five months of 2020, highest in the last two decades (barring remonetisation period in 2017)." 
     
    Ind-Ra says it believes this has mostly been caused by two factors, first precautionary holding of cash and second government disbursements being at the bottom of the pyramid.
     
    "The former is explained by the uncertainty owing to the COVID-19 breakout and prolonged lockdown. Individuals hoarded cash to avoid any risk of disruptions in the normal banking activities, a usual behaviour. Followed by the precautionary cash holding, government spending through various relief schemes has further flown to the bottom of the pyramid," it added.
     
    As against the common myth, Ind-Ra says it believes that this growth in deposits has not been on account of a surge in savings. It says, "Not only the lockdown has caused a significant decline in overall purchases, it has also eroded the income and wealth of producers and sellers; therefore, there is almost not much impact on aggregate savings.
     
    Moreover, even in the normal course, spending happens through the transfer of money between various modes in the banking system, without affecting aggregate deposits (barring a portion of sustained cash-based transactions). Therefore, spending in an economy (other than imports and cash transactions) has almost zero-sum impact on its aggregate banking deposit." 
     
    The ratings agency says it believes that the deposit growth has been on account of a process known as endogenous money creation, where incremental credit creates fresh deposits in the banking system. 
     
    During January to May 2020, incremental credit in banking system remained tepid, but the centre and various states borrowed significantly. 
     
    "It was also observed that the support from the RBI to the central and state governments has increased substantially through ways and means advances to address short-term funding gap for the respective governments, along with open market operations to ensure the system liquidity is at ease. While there has given a fillip to reserve money, muted bank credit has reduced broad money creation, leading to a lower multiplier," Ind-Ra says.
     
     
    While there is a high system-level deposit growth, for individual banks it is asymmetric growth, the ratings agency says. 
     
    As per Ind-Ra, the five key defining factors for deposit accruals in the Indian banking system are franchise; geographical spread (like branches); rate of interest offered; and impact of technology and customer segmentation and service orientation. 
     
    Traditionally, banks competed on franchise, geographical spread and customer service levels for accrual of deposits, however with the emergence of new-age private banks and SFBs, factors such as rate of interest offered, technology and digital offering and customer service have gained importance. 
     
    "Banks with large operations, strong retail and granular current and savings account profile would continue to gain deposits in the near term at the cost of other private banks as the redistribution of deposits could continue," the ratings agency says. 
     
    While the sources of deposit creation have seen a change, Ind-Ra feels even the profile of banks that are accruing these deposits is undergoing a change rapidly. It says, "This is clearly visible in terms of flight to quality and safety, with AAA rated banks witnessing increased deposit accretion rates, both on qoq and yoy bases. We expect this to continue in the near term with new-age private banks, regional banks and SFBs mostly slowing down, as safety has come at the forefront after the events that played out with PMC Bank and thereafter Yes Bank". 
     
     
    Over the medium to longer term, the ratings agency feels, while new-age private banks, regional banks and SFBs could regain their momentum partly, the dominance of banks with strong franchise and large geographical spread would continue, given the higher safety (read mental peace) that they offer to their deposit customers. 
     
    Ind-Ra says its interactions with a few SFBs suggest that while they were facing challenges in March 2020, the pressures have eased in April and May and they are able to accrue deposits once again amid reduced deposit rates.
     
     
    According to the ratings agency, large banks – both public and private are both well capitalised and sitting on surplus liquidity amid the muted credit offtake environment and it believes that this will lead to competition for credit offtake once it returns in the system. 
     
    "Large banks will be able to attract better rated customers by taking advantage of their lower cost of funds, driven partially by their lower cost of deposits. Thus, in the agency’s opinion, the overall risk profile of small-sized and low-rated banks from an asset quality perspective will become vulnerable as they have to sacrifice margins to compete with large banks for the same accounts or will have to on-board low-rated customers," Ind-Ra concludes.
     
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    COMMENTS

    tillan2k

    2 weeks ago

    Lot on money released by economic easing and direct transfer has raised share prices without any reason when economy is down explanation is cheap money at the hands of speculators, and promoters . A feature i hope SEBI takes note an dwatches virual book building to corner shares

    ICICI Bank sells 3.6% stake in ICICI Lombard for Rs 2,250 cr
    ICICI Bank on Friday sold 3.6% stake in ICICI Lombard General Insurance Company for around Rs 2,250 crore.
     
    The development comes after the bank, while announcing its January-March quarterly results in May, had said that it would look at further strengthening the balance sheet as opportunities arise. Post the divestment, ICICI Bank's stake in its general insurance stands at around 51.9 per cent.
     
    "In line with this intent and pursuant to approval granted by the board, the bank hastoday divested 18,000,000 equity shares of face value of Rs 10 each of ICICI Lombard General Insurance Company Limited, representing 3.96 per cent of its equity share capital at March 31, 2020, on the stock exchange for an approximate total consideration of Rs 22.50 billion," the bank said in a regulatory filing.
     
    ICICI Lombard GIC has Gross Written Premium (GWP) of Rs 14,789 crore for the year ended March 31, 2019, according to the company website. The company issued over 2.65 crore policies and settled over 16 lakh claims as on March 31, 2019.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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