Credit Is Feed For Bigger Fish

With both public and private sector banks offering services through them, mobile financial transactions are here to stay. However, recent incidents of customers being driven to suicide after being unable to repay loans from financial technology (fintech) companies have raised concerns about their operations. Why are people, including small enterprises, seeking these quick but high-interest loans that can be availed of without any verification instead of seeking bank loans at more affordable rates?

Describing Fintech or app loans as ‘paperless banking’, senior bankers claim that their activities are in contravention of the Negotiable Instruments Act, 1881, which requires that loans cannot be given without verification. Fintech companies, some of which are being probed for alleged fraudulent practices, have been giving out loans without any collateral/identity verification, unlike banks, which go through due diligence before offering loans. So far, the RBI has not laid guidelines or ensured supervision of fintech players.

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Despite criticism of app loans, experts and bankers agree that fintech companies are here to stay as they serve a fast-growing market need. Most are, however, reluctant to state that these sources of easy credit are bridging the gaps in services not being fulfilled by banks, particularly when people are still trying to cope with job losses and wage cuts. Government efforts to ease the burden of EMIs and loan repayments though a moratorium on repayment for a few months have not been enough for most borrowers too.

Thomas Franco, general secretary, All India Bank Officers Confederation, feels that if the banking system had risen to the challenges thrown up by the pandemic and provided adequate credit, people would not have used “these loan apps which are using dubious methods for recovery and also charge huge interest and service charges”. He adds, “Today, small credit for the common man is not available from the regular banking system, including public sector banks.” Franco, however, concedes that given the high cost of giving small loans in view of inadequate manpower, banks generally favour giving larger loans to fewer entities.

The government push towards merger of banks to create large banking entities like SBI, which has 18,000 branches, along with inadequate rec­ruitment after lakhs of employees availed of voluntary retirement scheme (VRS) offers, have left banks ill-equipped to meet the challenges of newer forms of money transactions.  Linking of Aadhar and PAN with bank accounts has made it easy for the loan apps by Fintechs to acc­ess customers, says Franco.

S. Nagarajan, general secretary, All India Bank Officers’ Association, also admits that the banking system is inadequate to the meet the challenges due to the pandemic, not because of lack of intention but due to Covid protocols, in addition to problems created by the merger of banks. These mergers, he says, has “landed banks in a sorry mess” due to the erosion of one-to-one relations or focused customer services some banks took pride in. The added problem of incomplete technical integration of merged banks has led to customers not getting services like quick approval of loans they had come to expect, with bank officials being aware of their credit worthiness and track record.

“During Covid lockdown, in the name of stimulation of the economy, government made many announcements without consultations with banks, which had to carry out their tasks without adequate manpower, movement res­trictions and other precautions that prevented bankers from attending to their regular work, particularly if they were not able to work from their assigned branches,” says Nagarajan.

Strongly opposed to the merger of banks to create mega entities, AIBOA has been upset over the closure of around 7,500 branches after mergers, mostly in rural areas. Today, for 6.50 lakh villages in the country, “we have hardly 51,000 regional rural banks to serve them, which is far below the requirement,” says Nagarajan.

Arun Kuman, former JNU professor, points out that while app-based loans and financial transactions are not new, the pandemic and its fallout on large sections of people has led to faster growth for fintech firms, many of which are being backed by NBFCs. He is concerned over the fallout due to the desperation of people seeking funds to tide over fund crunch.

Vikas Srivastava, professor of finance, IIM Lucknow, says that while a deepening of the fin­ancial market with the growing presence of fintech companies is welcome, “there is need for them to be regulated”. He points out that for companies seeking working capital to get back into operation, after the lockdown drained their resources, and to meet past commitments and workers’ wages, the app loans were an easy way out of crisis. However, the aftermath has been ungainly, as many reports of harassment, leading to several suicides, prove. Though less exp­ensive than borrowing from loan sharks, most app-based loans charge around 35 per cent or more as interest.

The emerging scenario is akin to a decade or more back when the RBI was forced to step in to set up regulatory framework for foreign-funded NBFCs (non-banking finance companies) who pushed multiple loans through microfinance companies and used strong-arm tactics for loan recovery.

Ramesh Arunachalam, a finance expert, says while there is need for new instruments like app loans to provide consumers easy access to funds, “focus needs to be on governance. The fintech companies need to have a clear and simple regulatory and supervisory framework”. He stresses that a regulatory framework is not enough if it is not backed by supervision.

Similarly, Arunachalam feels that capping of interest rates, as was done for NBFCs, may not be the solution, as it often leads to companies seeking opportunities for shortcuts for better returns on their investment.

Bankers are upset with the RBI’s stance and lack of regulatory and supervisory action vis-à-vis such digital transactions. They feel RBI’s affidavit at the Supreme Court, stating that Google Pay does not require a license, was an unfortunate stand.

Ratings agency Standard & Poor’s (S&P) in a rec­ent report states that with the banking system continuing to fall short of need in terms of penetration in rural areas, while continuing to grapple with high credit costs and poor asset quality in a weak credit cycle, leading NBFCs, new private-sector banks and the State Bank of India rem­ain at the forefront of technology adoption.

Several NBFCs have made considerable traction in having technology-led banking solutions in their core business models, S&P says, adding, “We believe the large incumbent banks in India are ready to get on the bandwagon. They have adopted various technology-led banking solutions, created ecosystems to increase customers, and bridged gaps with fintech collaborations.”

S&P believes the strategy of adding value bey­ond basic banking services and consequently becoming a part of customers’ lifestyle will boost customer engagement and relevance for banks. The app-based loans seem slated to not just remain relevant but also make rapid strides. But whether they will ultimately benefit large masses seeking quick loans remains unc­ertain unless the regulator steps in.