RBI governor Shaktikanta Das cautions on backdoor entry in financial space

The use of technology has made financial entities more efficient, but it has also led to backdoor entry of unregulated players into the financial space that often do not abide by norms, Reserve Bank of India (RBI) Governor Shaktikanta Das said on Friday.

“This leads to several concerns including mis-selling, breach of customer privacy, unfair business conduct, usurious interest rates, and unethical loan recovery practices,” Das said at the annual conference of RBI ombudsman at Jodhpur.

“Customers are initially tempted to borrow from these entities because of simplified or no documentation requirements followed by prompt disbursals. It is only later that the customers realise the serious downsides to such borrowings,” Das said.

Digital lending apps mushroomed during the pandemic as the economic downturn led many borrowers to resort to such apps for immediate need of funds. Quite often, apps were found to be charging higher interest rates from customers and resorted to unfair practices during recovery, which resulted in the death of many borrowers across the country.

The RBI recently came out with detailed guidelines on digital lending mandating such entities to provide a key fact statement to the borrowers. The statement will contain the annual percentage rate (APR), the recovery mechanism, details of grievance redressal officer designated specifically to deal with digital lending/fintech-related matters, and the cooling-off/look-up period. The central bank has specified that the REs cannot charge the borrowers any fees that are not mentioned in the statement.

Speaking about the customer grievance redressal mechanisms, Governor Das said the central bank had introduced a comprehensive ombudsman scheme last year that had led to a significant reduction in the proportion of non-maintainable complaints on account of increased awareness.

Even disposal rates and turnaround times have improved. “These are positive trends, but I believe there is still a scope for improvement. It is imperative to further enhance the level of coordination and cooperation between the regulated entities and the RBI Ombudsman to bring down the turnaround time for customers,” Das said.

The governor, however, lamented that despite RBI’s increased focus on customer service and protection, there are persistent grievances in some specific areas like mis-selling, lack of transparency in pricing, disproportionate service charges, very high penal rates, etc.

“Stories in social-media about use of strong-arm tactics by some recovery agents overshadow the good work that is being done for customer protection, both by the regulated entities and the RBI,” he said.

Although some number of complaints is expected from such a large financial system, the concerning fact is much of the complaints pertain to traditional banking.

“This calls for a serious review of the working of the customer service and grievance-redress mechanism in the regulated entities. The root cause of persistence of such grievances need to be analysed and necessary corrective measures undertaken,” Das said.

The governor said the board and top management of regulated entities had to play a crucial role in mitigating these concerns by ensuring that there is customer centricity in the design of products, the support process, delivery mechanism of products, and post-sales services.

“Commercial considerations are important, but they must necessarily be aligned with customer orientation in every aspect, including strategy and risk management,” he said.

The governor again reiterated the fact the regulated entities cannot wash their hands of while outsourcing any activity to third party vendors. This comes in light of the Jharkhand incident where a young female lost her life due to unreasonable methods undertaken by an outsourced recovery agent of Mahindra & Mahindra Finance.

“Regulated entities have a legitimate right to recover their dues within the ambit of our regulatory guidelines and the law of the land. Use of strong-arm methods is unacceptable. Stronger board-level oversight and closer monitoring by senior management over outsourced functions, therefore, assume critical importance,” Das said.

The RBI has said regulated entities engaged in credit delivery through digital lending methods will have time till November 30 to comply with the digital lending norms for ‘existing digital loans’ category, but for new customers and existing customers availing of fresh loans these norms will be applicable immediately.