India's retail lending industry must settle conflict of interest

Non-banking financial companies (NBFCs) must follow fair, respectful and empathetic practices when ensuring last-mile credit availability, said Finance Minister Nirmala Sitharaman recently. Speaking at the NBFC Symposium 2025 in New Delhi, she encouraged companies to increase their market share to 50 per cent from 25 per cent, but equally directed them to ensure that loans to customers weren’t “pushed”. While her comments were motivating to NBFCs, a moot point remains: How do you ensure loans aren’t pushed when frontline field teams at lending institutions are primarily driven by incentives linked to disbursements? 

The compensation of frontline bank and NBFC employees (typically comprising majority of total staff) is structured as a certain amount of fixed income and disbursement-linked incentives, which are often paid on a monthly or quarterly basis. Maximising income or incentives is a frontline employee’s primary objective and they largely focus on disbursals. That potentially makes them give scant regard for repayment of loans by borrowers. 

Ironically, lending is the only business where sale or disbursement doesn’t result in a profit. Profit is earned when the last few equated monthly instalments are received. So, while remuneration of senior management in banks and NBFCs is regulated and often linked to performance or profitability of the lender, the majority of the team is focused on disbursement. That results in a clear misalignment between employee and overall objectives. 

As we look to drive financial inclusion, we must remember that several first-time borrowers may not be well-informed about the implications of their decisions. With frontline teams incentivised to maximise disbursements, quite often, customers may be encouraged to borrow well beyond their repayment capacity. New companies, frontline employees and heightened competition to earn incentive are some factors that have perhaps contributed to the overleveraging of borrowers — a fact we are all coming to terms with presently. 

As frontline employees go about pushing loans and maximising their incentives, they are aided by the valuation ecosystem in mortgage-backed lending. With little or no accountability in processes, very often the same property is valued differently to meet the disbursement requirements of frontline teams. For example: Valuer X may give two different valuations to two different frontline employees and there isn’t any basis to validate the same. There isn’t any way in which the valuer can be made accountable.  

How can we build a better and more transparent ecosystem to benefit the customer, lender and overall economy? 

n To start with, it is important that all employees are aligned with the objectives of the lender. Every employee must strive to work towards profitability enhancement. Incentives must, therefore, be linked to profits to ensure that employees stick to sound lending practices and aren’t only focused on disbursements. 

n The process of valuing collateral is something that needs to be standardised as far as possible. One way of doing this could be by setting up a central repository where property valuations are uploaded and stored on a common platform that is accessible to all regulated entities, much like a credit bureau. Such a central repository would enable lenders to verify valuations and discourage valuers from providing different assessments for the same property, depending on who hires them.

n And finally, we must all play our part in customer education and awareness. The requirement of a key-facts statement being issued to the borrower is a good initiative that brings transparency. The customer must be educated to make an informed and responsible choice, understand the importance and implications of timely servicing or default. 

The Finance Minister’s call to banks and NBFCs to work together in advancing financial inclusion and achieving the vision of a Viksit Bharat is both timely and encouraging. Addressing a few of these key issues mentioned will go a long way in creating an environment that benefits both borrowers as well as lending institutions. 

 

The writer is founder-MD & CEO, Tyger Capital