Borrowers Should Be Saved From Predatory Lending

MUMBAI: RBI-promoted Banking Codes and Standards Board of India has said there was a need to protect consumers from irresponsible predatory lending by banks.

Speaking at the IVth International Forum on Financial Consumer Protection and Education in Budapest, Banking Codes and Standards Board of India chairman Kishori Udeshi said in their keenness to enlarge the loan book, (and thereby improve their NPL ratio statistically) banks give scant attention to borrowers’ capacity to repay.

“This is a world-wide phenomenon, especially when there is excess liquidity sloshing around. Excess liquidity puts downward pressure on lending rates and hence the search of vulnerable sections to lend to who are price takers.”

Slack lending decisions at such times invariably lead to harsh actions against the borrower at the time of recovery. “In India, the Supreme Court has held that if the basic work of selection and assessment (of a client) itself is shoddy, and consumers are lured to take loans, which they may not really need or are beyond their repaying capacity, then banks clearly need to justify their actions for recovery,” she said.

Recovery through agents, as a system, is here to stay and trying to regulate them would in no way attack the problem or provide the solution. While she felt that consumers needed protection against such lenders, she added that regulations of banks or recovery agents will not help bring about responsible lending.

“While Central banks should not retract from the path of deregulation, banks must tread this path with social responsibility. What is needed together with deregulation is tighter on-site supervision and off-site monitoring coupled with stiff exemplary action against errant banks,” she said.

According to Ms Udeshi, if central banks are really serious about their responsibilities of improving access to financial services so that the financial system can serve the community at large, then, any disregard by banks of rules and regulations should be judged by central banks as a reflection on the “fit and proper” criteria of the corporate governance of such banks. “Exemplary action taken by a central bank in this direction may do more for consumer protection than a hundred consumer awareness programmes,” she said.