Runaway retail credit growth highlights urgent need to protect consumers

Tucked away in the Reserve Bank of India’s (RBI’s) Annual Report FY24 is the following: The Consumer Education and Protection Department (CEPD) plans to “conduct a survey to assess the reasons for the low level of complaints in rural and semi-urban areas in FY25”. And that the low level may be an indication that customers in these geographies may not be aware of redressal mechanisms. The RBI will review and roll out a reoriented nationwide intensive awareness programme based on the feedback received from regulated entities (REs) and Offices of the RBI Ombudsmen. It will improve the complaint management system to enhance support in lodging complaints and ensure greater consistency in decisions and outcomes. 

Complaints rising

  The Annual Report of Ombudsman Scheme (FY24), released last week, has it that during the year there was a notable increase in number of complaints: 934,355 were received at the 24 Offices of the RBI Ombudsman (ORBIO), and Centralised Receipt and Processing Centre (CRPC), an increase of 32.81 per cent. Out of these, 293,924 complaints (31.46 per cent) were received at the ORBIOs and 640,431 (68.54 per cent) at the CRPC. The complaints received at the ORBIOs increased by 25.24 per cent to 293,924 while at the CRPC, it was up 36.59 per cent to 640,431. This uptick is linked to another observation in the RBI Annual Report: Developing a consumer protection assessment matrix for REs and strengthening the internal grievance redressal framework to encourage banks to take proactive measures for improving customer service. 

The runaway growth in retail credit has called attention to the lack of a body which bats on behalf of consumers to offer guidance, mediate disputes and promote awareness about responsible borrowing. “Consumer forums are useful in providing information on how to navigate the complex and often opaque world of credit contracts,” says Renuka Sane, managing director, TrustBridge. They can help address gaps in knowledge when consumers enter into contracts, and when they need recourse to deal with distress. As she views it “this is a missing piece in the credit landscape”. 

 

 

The Banking Codes and Standards Board of India (BCSBI) set up by the RBI to monitor and ensure that banks adhere to voluntary codes and standards was shut down in 2011 (it was headed by former deputy governor K J Udeshi). While the reasons for this move were not made public, it is surmised that with the setting up of the CEPD in RBI, there was no need for the BCBSI – it would have led to duplication. 

A Supreme Court (SC) decision last month to overrule a ruling by the National Consumer Disputes Redressal Commission's (NCDRC) of 2008 that placed a 30 per cent cap on late credit card payments has put the spotlight back on consumer redressal. The SC held that NCDRC had no legal backing to set such a cap. But the question now is: How much will you have to pay on late card payments? And which is the body to take up concerns on behalf of customers? Given that there is no entity on the lines of the All-India Bank Depositors’ Association (founded by the late M R Pai) for retail credit. 

‘Usurious rates’

  Rajesh Narain Gupta, founder and chairman of SNG & Partners, is categorical that the move on the part of lenders to grow the retail book and targeting consumers with thin files (who have little by way of credit histories) and new-to-credit have brought about the situation we are in now. “The interest rate being charged is usurious in nature in many instances. What was peculiar to the informal sector is now within the formal fold. Also, look at the use of retail loans to subscribe to IPOs of firms.” As for the open question as to which body is to take up the compelling issues of consumers, “this is to be debated; it can’t be the IBA (Indian Banks’ Association)”. In the US, you have the Fair Debt Collection Practices Act and the Consumer Financial Protection Bureau. “In the name of retail loans, ordinary people get into financial problems. It is high time that RBI comes into the picture,” says C H Venkatachalam, general secretary of the All-India Bank Employees Association. 

The Financial Stability Report of December 2034 (FSR: December 2024) refers to the sharp rise in write-offs of retail loans, especially among private sector banks, “which could be partly masking worsening asset quality in this segment and dilution in underwriting standards”. Nearly half of the borrowers availing of credit card and personal loans have another live retail loan outstanding, which are often high-ticket loans (i.e. housing and/or vehicle loan). A technical aspect comes into play here: Given that a default in any loan category results in other loans of the same borrower being treated as non-performing by lenders, larger and secured loans are at risk of delinquency from slippages in relatively smaller personal loans. 

 

Fresh accretion of retail bad loans was also dominated by slippages in the unsecured loan book, with 51.9 per cent stemming from it at end-September 2024. This has to be read along with the analysis of the Securities and Exchange Board of India: Retail individual investors engaged in ‘flipping’ behaviour, selling 50 per cent of the shares allotted to them by value within a week of listing. This leads to the end use of funds. It could be that personal loans are being used for bourse investments.  Incidentally, the FSR-December 2024 says the above Rs 15 lakh income category recorded the highest growth in personal loans. In terms of outstanding loans, the Rs 5 lakh-15 lakh income slab had the largest share end-September 2024. 

What about fintechs? A Fintech Association for Consumer Empowerment (FACE) report has it that of September 2024, the fintech personal loan volume is 50.6 million (unique loans) with an outstanding value of Rs 66,683 crore, down 10 per cent from year ago. For young borrowers, fintech lending is the choice, with two-thirds of loan sanction value to borrowers aged under 35 years. 

“Fintech lending’s ability to seize the opportunities offered by a growing segment for their current and future needs holds enormous promise to grow responsibly and sustainably for many years,” says the report. But the audience they serve is relatively new to credit; plus, you have the element of usurious rates. “Through our members' outreach with a large customer base, we amplify our and other relevant campaigns through industry, regulators, and the government. The hard part is getting customer attention and changing behaviour, which needs constant and consistent enforcement of messaging in a way that customers can relate to,” notes Sugandh Saxena, chief executive officer, FACE. 

What you can't get away from is the retail credit story is at an inflection point.