What does RBI want?
This year, through speeches and actions, the message from RBI has been bold - all financial entities – big and small – have to toe the line. The RBI Governor had strong words in the monetary policy review earlier this month for NBFCs that persist in the “imprudent ‘growth at any cost’ approach”. While commending NBFCs at large for their role in extending financial inclusion to the underserved and remote segments in India, he had censured “outliers” who were aggressively targeting growth without sustainable business practices, whose excessively high interest rates, processing fees and “frivolous” charges were putting financial stability at risk. A week after his statement, four NBFCs were ordered to stop giving fresh loans, throwing the industry in a tizzy.
There has been a slew of news and opinions on this latest action - Tamal Bandopadhyay has a data-rich analysis, suggesting that a graded approach, with notices sent to errant firms in advance, would have been a preferred regulatory tactic, rather than the sudden cease and desist orders. Dinesh Nair points out that multiple warnings from the RBI had been ignored by the errant firms, and the latest action was necessary, it will discipline industry and has pre-empted a crisis. Raghu Mohan opines that the RBI was not being alarmist in its action and the churn that will ensue will be good for the system. On the other hand, Andy Mukherjee has painted a dark picture – while accepting that the RBI has a valid concern of subprime borrowers falling into a debt trap, he points out that this ban on fresh loans from four large regulated entities could impact investment and flow of capital to nonbank lenders.
Following the order, the market is reworking partnerships, co-lending models are being reassessed. Meanwhile, Sa-Dhan, the RBI- approved SRO for microfinance institutions, is looking to suggest that MFIs should cap their RoA (return on assets) ratio to 4 percent and will be collating data from its members on current rates and practices to make more recommendations as responsible industry norms.
However, the fundamental question that arises is – given the regulatory stance has been quite clear, why do regulated entities still believe they can get away with stretching the regulator’s patience? Here, Renuka Sane has some answers– for all the talk and action from the RBI, regulatory orders and guidelines are in fact quite fuzzy, making compliance a challenge. For instance, she takes up the point of “usurious” interest rates mentioned in the RBI press release. The RBI policy on interest rates does not prescribe any limits, leaving the decision to the Boards to decide and implement. In such a situation where the Board is officially responsible for the rates, how should industry interpret the press statement that “the Weighted Average Lending Rate (WALR) and the Interest Spread charged over their cost of funds, which are found to be excessive and not in adherence with the regulations”. Another important point raised by Renuka is that the order has no clarity for customers – do existing customers get any recourse from the “unfair” treatment, what is the impact on customers who were in the process of taking loans in the interim period between the date of the order and its implementation etc. There’s lots more in this must-read piece.
Industry is now looking at speeches from the top brass as signals for forthcoming actions. But this can create an atmosphere of uncertainty and doubt. From all that has ensued over the past year, the conclusion is clear - RBI must up its communication skills. When the regulator is not crystal clear in its directions and appears overbearing in its actions, the entire ecosystem, including customers, is hit.
This month, we highlight two interesting reports released from NABARD – a) the Second All India Rural Financial Inclusion Survey (NAFIS), which has considerable insights into the status of financial inclusion in rural households. While the survey is comprehensive, data on business correspondents is conspicuous by its absence in the report, though questions have been asked in the survey forms. Given that more than 90% of rural banking outlets are manned by BCs, details on usage and quality of service will plug a large gap in current data on financial inclusion; b) the first of the bi-monthly Rural Economic Conditions and Sentiments Survey, released for September 2024 throws a lot of light on the status in the hinterland. This report reinforces the challenge that rural households face with growing debt fueling consumption expenditure, and more than three-quarters reporting stagnant or lower savings. It will be extremely useful to see the impact of policy actions on rural finances through results from forthcoming surveys.
Do read more news and views in our curated list below. Please also follow our Indicus Centre for Financial Inclusion page on Linkedin to continue the conversation.
RBI Deputy Governor Swaminathan spoke on proactive oversight from the central bank that is needed to prevent a crisis, and ensure resilience and financial stability.
MicroSave Consulting, Sa-Dhan and JPMorganChase collaborate towards a report - Decoding the Financial Health of Women-owned Microbusinesses – that aims to unpack the concept of financial health specifically in the context of women entrepreneurs.
Sukhpreet Kaur and Arshi Aadil, MicroSave Consulting have set out five recommendations to address insurance mis-selling in rural India.
Mohammad Haris, News18, writes on empowering women, bringing updates from PayNearby’s Digital Naari programme, that is driving financial inclusion at the grassroots.
Arundhati Ramanathan, The Ken, writes on the makeover of the bank-fintech relationship.
The RBI issued a draft circular for public feedback by November 20th, which seeks to prevent overlap in lending businesses between a bank and its group entities. If implemented, there will be repercussions for bank business models and valuations.
Raghu Mohan reports on the move by the Business Correspondent Resource Council (BCRC) for an increase in the commission paid to agents with the Ministry of Finance, along with related issues such as the setting up of an annual pricing review committee and a re-examination of the penalties imposed by banks on business correspondents.
Fintech Association for Consumer Empowerment (FACE), the SRO for fintech, is to change its membership profile to make it more representative of the sector.
Raghu Mohan, Business Standard looks at the latest push from the RBI to fintechs for a “same-day” loan offering targeted at vendors and hawkers.
Malika Anand, Alexander G. Sotiriou, David Kruijff and Swati Sawhney have a Focus Note out from CGAP on inclusive fintech startups.
Seth O'Farrell writes in The Banker on the fintech ecosystem in India.
Aditi Shah from Aapti Institute unpacks the concept of digital trust, that influences women’s engagement with the digital world. Manvi Parashar from Aapti Institute explains why and how customising trust relationships in the digital world, give women control.