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.