The lending ecosystem in India is currently under increased scrutiny by the Reserve Bank of India (RBI). This has caused many industry players to reassess how they conduct business and has significantly impacted consumers.
With the RBI’s plans to implement stricter regulations, it is important to explore the current lending ecosystem and understand the implications for industry players and consumers.
This article will explore the lending ecosystem under RBI scrutiny, the effects on industry players and consumers and suggest ways to ensure that the industry remains compliant and customer-centric.
By understanding the current landscape, the article will provide an overview of the regulations, the implications of those regulations, and the steps that industry players can take to ensure they are compliant and continue providing quality services to their customers.
Overview of the Lending Ecosystem in India
The Indian economy is growing rapidly, and the demand for credit is ever-increasing. This, paired with the rise of technology, means a shift in the lending ecosystem and how lending is conducted. In 2017, the total amount of lending in India was INR 46.8 trillion, according to the Reserve Bank of India (RBI) statistics on the Indian Financial System.
Credit cards accounted for 35.2% of this lending, followed by personal loans at 18.7%, and auto loans at 7.9%. A majority of this lending is backed by assets such as real estate, gold, and commodities. As assets back this lending, it has a significantly lower default rate than unsecured loans.
According to a report by Credit-Loan.in, the unsecured lending industry in India is expected to reach INR 15.5 trillion by 2020, mostly driven by the increase in internet users in the country. The report also states that unsecured personal loans are currently the most popular type of unsecured lending.
Impact of RBI Scrutiny on Industry Players
The RBI has conducted inspections at several lending institutions and forced some to shut down their operations. RBI inspections have uncovered several issues, including falsification of documents, misreporting of data, and inadequate KYC verification.
The scrutiny of the lending ecosystem has significantly impacted industry players as they have to ensure their compliance within the given time period, which is often very short. In addition, increased scrutiny has improved customer confusion regarding terms, processes, and documentation. This has led to a decrease in the customer experience and borrowing capacity.
To ensure continued and sustainable business operations, industry players must ensure they are compliant with the regulations issued by the RBI. If a lending institution does not ensure compliance, it can face consequences, including the closure of operations, hefty fines, and loss of customer trust.
Impact of RBI Scrutiny on Consumers
As mentioned above, the RBI scrutiny has resulted in a decrease in customer experience and borrowing capacity. The scrutiny of the lending ecosystem has resulted in a significant increase in documentation requirements, many of which are very difficult for the average consumer to obtain.
The RBI has issued guidelines to lending institutions regarding factors such as the percentage of income that should be allocated towards repaying loans and the documentation required for different types of loans. It has also issued guidelines regarding the maximum amount that can be borrowed against certain assets such as gold and real estate.
In addition, the RBI has issued guidelines requiring lending institutions to provide customers with a detailed breakdown of their expected repayment schedule, interest rate, and the total amount that will be paid back over the loan. These guidelines are expected to provide consumers with more information and enable them to make more informed decisions when taking out a loan.
However, these changes have significantly increased the amount of time it takes to approve a loan for a customer. This has caused an overall decrease in the borrowing capacity for customers.
Regulations Implemented by RBI
The RBI has implemented a few regulations regarding lending practices in India. They include:
Implications of Regulations on Industry Players. Due Diligence (DD) Period
— This refers to a lending institution’s time to complete a customer’s information verification process. Currently, the DD period is 180 days. The increased minimum amount for a gold loan
– The RBI has increased the minimum amount required for a gold loan to INR 2.5 million. This ensures that only serious customers take out this type of loan. The increased minimum amount for real estate loan
– To reduce the number of customers taking out loans against their real estate property, the RBI has increased the minimum amount required to INR 10 million. Mandatory credit rating for all new loans
– Lending institutions must obtain credit ratings for all new loans. This will result in a more accurate breakdown of the risk associated with each loan.
Implications of Regulations on Consumers
Mandatory shared ownership for all joint borrowers — The RBI has issued guidelines that mandate joint borrowers to share ownership of the assets being used as collateral for a loan. This is being implemented to ensure that both parties are equally responsible for repaying the loan if the first party defaults. Increased documentation for women borrowers
– The RBI has increased the documentation required for women borrowers who want to take out a loan. This is being done to ensure that women borrowers are fully aware of the implications of borrowing money and that they are fully informed before taking out a loan.
Best Practices for Industry Players
To ensure continued business operations and compliance with the RBI regulations, industry players should consider the following: –
Ensure that your systems comply with the RBI guidelines: Make sure that you have the right plans in place to ensure that all loans are being conducted promptly. This includes the proper authentication of customers with their appropriate KYC documents and ensuring that customers are provided with full disclosure regarding all terms and conditions of their loan.
– Ensure continuous training for employees: It is essential to train employees regularly so that they are aware of the new regulations and can ensure compliance. Regular training sessions will also ensure that the employees are up-to-date with the latest technological changes in the lending ecosystem.
– Take advantage of technology: Many technological solutions can help implement the new lending regulations. These include identity verification software, data management software, and lending software. By taking advantage of these technologies, you will be able to manage the complexities of the new regulations and ensure compliance.
The Way Forward
The lending ecosystem in India is ever-changing and constantly evolving. The regulations implemented by the RBI will help to ensure a more trustworthy lending ecosystem. However, many of these regulations are new and are expected to cause a significant impact on the lending ecosystem.
To ensure success as an industry player and compliance with the regulations, it is important to understand the lending ecosystem and the implications of the regulations. As an industry player, ensuring that you have the right systems and processes in place is important.
Additionally, you can take advantage of technological solutions such as lending software to help manage the complexity of the new regulations and ensure compliance. When taking out a loan, it is important to understand the regulations and the implications that they may have on the lending ecosystem.
By taking the time to understand the regulations, you will be able to make better decisions as a borrower and ensure that you receive the best possible service from your lending institution.