Editorial. RBI must crack down on lenders cheating small borrowers 

For a long time, loan products in India have not been as well-regulated as saving and investment products. With financial liabilities of Indian households expanding faster than assets and digital lenders wooing customers who are new to credit, this anomaly was crying out for correction. The Reserve Bank of India’s (RBI) recent initiatives to hold regulated entities accountable for fair practices when dealing with retail and MSME (Micro, Small and Medium Enterprises) borrowers, are therefore welcome.

In a recent circular directed at banks, NBFCs and micro finance institutions, RBI has flagged unfair lending practices it unearthed during recent inspections. The circular details some shocking practices. Some lenders were found to be charging interest to their borrowers from the date of sanction of the loan or the execution of loan agreement, rather than the date of actual disbursement of the money. In other cases, lenders were found to be charging interest on the full loan outstanding for the entire month, though the borrower had made partial repayments early in the month. In yet others, lenders collected loan instalments from customers in advance, but failed to give credit while charging interest on outstanding loan amounts. RBI has said that in such cases, it has advised the lender to refund the excess charges to borrowers. It has also asked all regulated entities to review their practices, to take corrective action.

Such malpractices thrive because borrowers are unaware of the fineprint when they sign on loan agreements. The proliferation of app-based digital lenders who offer instant loans to desperate borrowers at the click of a button, has aggravated the problem. To address this, RBI had also ushered in a new requirement recently that all lenders share a standardised ‘Key Facts Statement’ (KFS) with their borrowers. The KFS is required to detail terms and conditions such as the total cost of the loan including processing and other fees, whether the loan is on fixed or floating rates, periodicity of rate resets, additional fees, penalties in case of delays in repayment and prepayment and so on.

It is heartening that RBI is subjecting the customer-facing practices of lenders to more scrutiny. In the past, RBI’s supervisory actions were focused mainly on detecting stress in borrower segments, warding off systemic risk and monitoring lenders’ adherence to prudential accounting and governance norms. But having detected instances of lenders blatantly short-changing customers, its follow-up action of merely asking them to refund excess charges, appears too mild. To really deter lenders, the RBI needs to name and shame regulated entities guilty of such sharp practices. It must also levy monetary penalties, as it has been doing for banks guilty of other regulatory infractions. RBI must insist that borrowers receive updates on their loan balances, interest rates and changes in the terms and conditions on an ongoing basis, and not just at the time of loan origination.

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