In an era, where banks and financial institutions are grappling to come to terms with an onslaught of frauds and irresponsible behaviour, a lot is at stake for the economy. Such incidents shatter the trust of masses in institutions like banks and NBFCs. We have been witnessing such incidents for more than two decades now. Initially, it was limited to stock markets and mutual funds. Now, it has gone into banking. Moreover, when such incidents happen in public sector organisations it causes more pain to public. In light of such a situation the recent Navigator study on Responsible lending offers to become a torch bearer for self-regulation.
"Navigator of Responsible Lending- India" - a first of its kind report on the state of Indian consumer lending sector with respect to responsible lending practices. This all India study was conducted at IIM Lucknow. Financial Planning Standards Board India (FPSB) was the validating partner for this study. Focusing on small ticket (up to Rs 15,000) personal and consumer durable loans across both banks and NBFCs, the first-of-its-kind research aims to introduce the Indian consumers especially first-time borrowers to the concept of responsible lending practices. This study was conducted from July-December 2017. It aimed to identify the key parameters and create an industry-wide institutional matrix and tool for self-regulation that will serve as the defining contours for responsible lending. Industry players have been evaluated through secondary research of customer touch-points such as website, points of sale experience and company literature, as well as by speaking to market players across a few geographies for qualitative inputs.
Definition of responsible lending
In India, there till date there has been no attempt to define Responsible Lending. Thus no formal definition exists. This study aims to undertake this study create measurable parameters of Responsible Lending. Internationally, especially in Europe such definitions exist. CPEC (2013), European Commission (2009, 2014) have given few definitions of Responsible Lending.
In 2009, EC said "Responsible Lending means credit products meet the needs of clients and reflect their ability to repay their debts. This can be achieved in the case of a suitable framework ensuring that all creditors and brokers act honestly, fairly and professionally before, during and after the transaction." In 2014, EC refocused itself on responsible borrowing and said that in addition to the above it is necessary to focus on sufficient verification of creditors' information on borrowers.
Responsible lending in India: Steps taken by the government
The Reserve Bank via its circular dated March 26, 2012, issued revised guidelines on Fair Practices Code (FPC) for all NBFCs to be adopted by them, while doing lending business. The guidelines were reviewed in view of the creation of a new category of NBFCs viz; NBFC-MFIs and also rapid growth in NBFCs' lending against gold jewellery.
Para 2 A (v) of the guidelines require that the Board of Directors of NBFCs should lay down the appropriate grievance redressal mechanism within the organization to resolve disputes between the company and its customers and the mechanism should ensure that all disputes arising out of the decisions of lending institutions' functionaries are heard and disposed of at least at the next higher level.
At the operational level, all NBFCs are required to display prominently, for the benefit of their customers, at their branches/places where business is transacted, the details of the grievance redressal officer belonging to their company as also that of the local office of RBI as detailed at paragraph (A) (vi) of annexe.
The revised guidelines are issued under Section 45 L of the Reserve Bank of India Act, 1934 (Act 2 of 1934). The NBFCs may note to make suitable amendments in their existing FPC. The FPC so modified should be put in place by all NBFCs with the approval of their boards within one month from the date of issue of this circular and should be published and disseminated on the web-site of the company, if any, for the information of the public.
Government of India issued the Master Circular DBOD No. Dir. BC.12/13.03.00/2014-15 dated July 1, 2014 consolidating the instructions/guidelines issued to banks till June 30, 2014 relating to Exposure Norms. This Master Circular consolidates instructions on the above matter issued up to June 30, 2015. This circular was issued in order to ensure the safety and protection of customers from exploitation by the lenders.
Objectives of navigator study on responsible lending
Present Navigator study on responsible lending was envisaged with the following objectives:
1. To create a platform that describes the state of consumer finance with respect to responsible lending practices towards customers
2. Defining framework for customer to evaluate lenders based on responsible practices
3. Stress necessity of financial literacy and financial inclusion to formal regulated financial services for all customer segments
4. Educate not only customers but also lenders, media and regulator
5. Offer a self-regulation tool for the sector
6. Five processes in the lending process were marked for lender feedback which constitutes Responsible Lending. They were
- Loan application process
- Lender's public information
- Fee and charges
- Loan servicing
- Financial inclusion
This data was recovered from the lenders. Then started the second phase of research which was website content analysis. This was done for cross authentication of the data received from lenders on above mentioned points. Websites of lender organizations were evaluated on the following parameters.
- EMI calculator presence
- Eligibility calculator presence
- Documentation & Charges
- Attractiveness & Inter-activeness
- Availability of information in vernacular languages, and finally
- Informative and communication
It was found that although lending organisations claimed to follow the principles of responsible lending in the primary survey there were gaps in the websites. For instance, many firms didn't have EMI calculator or eligibility calculator. Even documentation and charges were not mentioned in the respective websites.
It can be deduced from this study that when considering the plight of CIBIL, it's very important to stress on financial inclusion. For instance, it will be a great service to this category of borrowers if the websites also give information in vernacular languages. As of now, nearly all the lending organisations' websites are in English only.
Another important aspect for small borrowers today is financial literacy, this means that financial inclusion should become the focus area. It's the duty of the lenders to educate the small time borrowers. This in turn would mature the market and finally expand it.
Responsible Lending has to become a movement in India. It is very important that financial institutions will have to adopt responsible lending as the driving principle. Irrespective of financial prowess of the borrower lender has to stick to its responsibility.
Loan defaults and cheating by big timers shakes the trust in the banking system. This is very fatal for a developing economy like India. Studying the dealings of UB group, Geetanjali and now ICICI Bank, It's high time, that we create measures to ensure transparency of operations as well as, prevention of action with conflict of interest. Who knows that very soon the principles of the present study may be applied to all types and scales of lending? It's the need of this hour that we develop self regulatory tools so that the trust deficit in financial institutions can be restored for the times to come.
(Author is Associate Professor at IIM-Lucknow and headed the research project titled Navigator of Responsible Lending - India)