Sushma Kaza PhD’s Post

Fake gold loans have gone beyond fake Fintech gold loans Now that my forecasts on retail unsecured loans 13 months ago are heading to fruition (I recommend readers to have a glance at those notes), it is time to move on.  My future notes will focus on 1) What are the M&A strategies (takeover of weak fintechs/microfinance companies/ NBFCs/banks) that strong financial institutions and distressed debt investors can deploy 2) What else is happening in the lending markets beyond retail unsecured.   In a note “Fake fintech “gold” loans” 6 months ago I had written: “I was very surprised that there were no credit events at Fintechs in April, post quarterly earnings. I thought the RBI diktats of December would cut bank loans to Fintechs for on-lending unsecured. I was wrong. The banks continued their Fintech lending under the garb of funding Fintech gold loans (instead of unsecured loans). This has to be fraud because a) if the borrower had gold to give as collateral, he would have done so instead of taking high interest Fintech loans b) Fintechs can't tell between gold and bronze” Since that note, I have realized that the fake gold loan market has moved beyond fintech fun and games to fake gold loans by traditional banks/NBFCs Two conflicting desires are driving such gold loans: 1)  Borrowers who want a loan but have run out of gold to pledge for such a loan over the last few years. Hence the addressable market for gold loans is smaller than the rosy business projections of banks and NBFCs. 2)  A relationship manager (RM) at a bank/NBFC who has to meet his gold finance targets Solution to the above problem: instead of loan against gold, have a modified product, loan against fake gold.  I think RBI shining its light on this sector is just the tip of the iceberg

By way of an update, the Reserve Bank of India (RBI), on 26 April 2024, has issued the following notifications: a) Frequently asked questions on its Guidelines on Default Loss Guarantee (DLG) in Digital Lending dated 8 June 2023 (FAQs); and  b) Draft Guidelines on "Digital Lending - Transparency in Aggregation of Loan Products from Multiple Lenders" (Draft Loan Aggregation Guidelines). 1. Summary of FAQs: (a) The FAQs have now clarified that DLG cover can only consist of pre-identified and measurable loan assets that have been sanctioned by a lender (DLG Set). (b)The DLG cover should be specified upfront and remain fixed. (c)The DLG cover would be calculated on the amount of loans disbursed proportionally under a DLG Set at any given point of time. (d) No Replenishment of the DLG cover in case of subsequent recovery. (e) As per the FAQs, DLG is not permitted for revolving credit facilities.   (f) Miscellaneous: (i) DLG is not permitted for loans arranged on peer-to-peer lending platforms. (ii)The DLG guidelines would not be applicable on loans sourced outside the Digital Lending Guidelines. (iii)DLG arrangements cannot be entered into for financing availed through credit cards. (iv) Lending services providers (LSPs) must publish the total number of portfolios and respective amounts of each portfolio on which DLG has been offered. The FAQs have further clarified that the name of the RE can be omitted from such disclosure requirements.  (v) The DLG Guidelines require a declaration from the statutory auditor of the DLG provider every time they enter into an arrangement with an RE. The FAQs clarify that no such declaration is needed from the statutory auditor of the RE to whom the DLG is being provided. (vi) The RBI has also prescribed the below additional requirements to be followed by REs acting as DLG providers. This includes that the RE should deduct full amount of the outstanding DLG from its capital. REs acting as DLG providers should have a board-approved policy in place as a best practice.   2. Summary of the Draft Loan Aggregation Guidelines. The Guidelines have been issued to promote ‘customer centricity’ and ensuring ‘complete transparency’ to the borrowers in the credit intermediation process. In cases, where loan product aggregation services are offered by many LSPs through outsourcing arrangements with multiple lenders, and the digital lending application (DLA) of the LSP / RE for matching its customers to one of the lenders, REs are advised to ensure that its LSPs comply with the guidelines.The LSP should provide a digital view of all loan offers available to the borrower from willing lenders with whom the LSP has arrangements.   The aforesaid changes impact operations of LSPs who source borrowers for multiple REs as they will have to restructure their loan offering to ensure uniform treatment for all such REs. The Draft Loan Aggregation Guidelines are open for public comments till 31 May 2024. #fintech#digitallending#LSP#RBIupdate

Digital lending has witnessed significant growth over the recent years offering borrowers greater convenience and accessibility to financial services. However, concerns have arisen regarding transparency in the digital lending process, particularly concerning aggregation of loan products by lending service providers (LSPs). In response, the Reserve Bank of India (RBI) has introduced draft guidelines titled 'Digital Lending – Transparency in Aggregation of Loan Products from Multiple Lenders'. On Friday, the apex bank released draft guidelines to ensure that lending service providers (LSPs) offer a digital overview of loans they provide in collaboration with other entities. Several LSPs offer aggregation services for various loan products. According to Akshay Mehrotra-Founder & CEO of Fibe, the RBI has prioritised 'customer centricity', and the guidelines issued aim to enhance transparency for both customers and lenders.’ #loans #transparency #digitaltransparency #RBI #reservebankofindia #newstoday #personalfinance #Timesnetwork #digitalmedia Compare before you borrow! RBI’s new rules for digital transparency DECODED https://lnkd.in/d8HH4RCK

RBI steps up scrutiny of retail lending, targets top-up home loans https://lnkd.in/gCrmX73h Download Economic Times App to stay updated with Business News - https://lnkd.in/gzT9Sxc4

P2P Lending: High Risk, High Reward P2P lending is gaining popularity as an alternative to traditional investments, but it’s not without risks. It allows you to lend directly to borrowers through online platforms, offering higher returns than fixed deposits. However, the returns come with a catch. What’s in it for Lenders? Higher Returns: Interest rates range from 8% to 24%, depending on the borrower’s risk profile. No Collateral: Loans are unsecured, meaning there’s no safety net if the borrower defaults. No Early Exits: Once your money is lent, it’s locked until the borrower repays. For Borrowers: Easier Access to Funds: A good option if traditional banks reject you. Impact on Credit Score: Timely repayment boosts your score; delays can damage it. What Do RBI’s New Rules Say? No ‘Investment Product’ Label: Platforms can’t market these loans as investments. No Liquidity Assurances: There’s no guaranteed return or early exit. Stricter Caps: Total lending capped at ₹50 lakh for lenders and ₹10 lakh for borrowers across platforms. P2P lending offers high returns, but the risk is real. Borrowers often have a low credit history, and defaults fall on lenders. RBI’s new regulations provide some safeguards, but due diligence is crucial. If you’re looking to lend, choose wisely, understand the risks, and don’t invest money you can’t afford to lose. For borrowers, it’s a flexible option but comes with strict repayment norms. Would you explore P2P lending or prefer safer alternatives? 👉Follow Chakrivardhan Kuppala for more insights on #personalfinance, #Wealthmanagement and #Investing🎉

The Reserve Bank of India (RBI) has issued a circular “Key Facts Statement (KFS) for Loans & Advances” on April 15, 2024 (Circular) to enhance transparency and reduce information asymmetry on retail and MSME term loan products offered by all regulated entities (REs). Here are some of the key points and implications of the circular: 1. As introduced by the Circular, REs shall be required to provide a KFS to all prospective borrowers containing the key information regarding a loan agreement, such as interest rate, fees, charges, tenure, repayment schedule, all-in-cost of the loan etc. At present, KFS is required to in respect of loans by scheduled commercial banks to certain class of borrowers like individuals, digital lending and microfinance loans. In essence, the Circular expands the scope of providing KFS to all REs for helping borrowers in making an informed decision in availing the loan. The KFS shall be in a standardised format and in a language understood by the borrowers. 2.The KFS shall also include a computation sheet of Annual Percentage Rate (APR) i.e, annual all-inclusive cost of credit to the borrower, which shall include all charges levied by the RE. Further, charges recovered by the REs on behalf of third-party service providers, such as insurance, legal, shall also form part of the APR. 3. In addition to the APR, the KFS shall also include the amortisation schedule of the loan over the loan tenor. 4. The KFS shall have a unique proposal number and a validity period of three working days for loans having tenor of seven days or more, and a validity period of one working day for loans having tenor of less than seven days, within which the borrower can accept or reject the loan offer. The validity period shall be the period available to the borrower, after receiving the KFS by the RE, to agree to the terms of the loan. 5. Any fees, charges, etc. that are not mentioned in the KFS, cannot be charged by the REs to the borrower at any stage during the term of the loan, without explicit consent of the borrower. 6. The KFS shall be explained to the borrower and an acknowledgement shall be obtained that he/she has understood the same. The KFS shall also be included as a summary box in the loan agreement. The Circular shall be applicable for new retail and MSME term loans sanctioned on or after October 1, 2024, including fresh loans to existing customers and REs have been directed to put in place the necessary systems and processes to implement the above guidelines at the earliest. In the interim, the relevant provisions on ‘KFS/Factsheet’ under the extant guidelines shall continue to remain applicable. The circular is expected to bring more uniformity and clarity in the disclosure of the terms and conditions of the loan products, and also enable the borrowers to have cost-benefit analysis of loan products offered by different REs in accordance with the Circular. #RBI #bank #retail #msme #loan #borrower #banking

Given the increasing concerns voiced by RBI about the high growth in unsecured retail loans over the last few months, one would have expected that some regulatory tightening is on the way. From that perspective, the measures announced today by RBI is not really surprising. Essentially, these measures endeavour to address two concerns: 1. Excessive growth of unsecured consumer loans in the financial sector through higher risk weight of 125% in case of both banks and NBFCs; higher capital requirements is expected to moderate the growth of such loans 2. Spread of any such systemic risks in the banking sector through increased risk weight on lending to non-priority sector NBFCs (+25% for those with external rating at A and above) Apart from a moderation in the aggregate growth of unsecured loans, the impact of the measures can be seen through the following: 1. A material increase in the rates charged on unsecured loans by banks and NBFCs 2. Higher cost of borrowings for large and small NBFCs (including FinTechs) with a high proportion of unsecured retail loans in their AUM 3. Increased focus of NBFCs on diversification of funding from banks and higher issuances in both public and private bond markets with attractive yields 4. Higher mobilization of capital by NBFCs into unsecured lending to cater to the additional capital requirements 5. Sudden withdrawal of banks and NBFCs from the consumer loan market may also enhance delinquency risks in this category RBI has also urged the lenders to have an adequate risk management framework in place for unsecured retail loans with board approved sectoral exposure limits and segmental limits, as applicable. This will go a long way in mitigating the systemic risks from any aggressive growth in unsecured loan exposures. #NBFCs #RBI #unsecuredloans #personalloans Acuité Ratings & Research Limited Sankar Chakraborti Prosenjit Ghosh Antony Jose C

We are delighted to announce a partnership with Karnataka Bank to empower the bank’s digital transformation journey through our proprietary technology platform, nPOS. nPOS is Northern Arc’s technology platform for co-origination and co-lending that helps banks to seamlessly connect with multiple originators for loan origination, underwriting, disbursement, and collection. This collaboration aims to enable Karnataka Bank to grow its portfolio in the retail segment by lending to small businesses and individuals in partnership with multiple NBFCs and fintechs across the country. The bank will use the nPOS platform to offer financial solutions to a broader customer base across products such as business loans, vehicle loans, consumer loans, personal loans and BNPL. Speaking on this partnership, Ashish Mehrotra, CEO & MD, Northern Arc Capital said, “We are delighted to partner with Karnataka Bank in their digital transformation journey. The nPOS platform will aim to enable the bank to accelerate its co-origination and co lending partnerships with Fintechs and NBFCs. This strategic alliance underscores our commitment to facilitate credit to the underserved and underbanked individuals and businesses and drive innovation within the financial industry by enabling banks to stay ahead within the rapidly evolving regulatory and digital landscape.”   The agreement was exchanged at Bengaluru by Mr. Ashish Mehrotra, CEO & MD, Northern Arc Capital and Mr. Shri Srikrishnan H, Managing Director & CEO of Karnataka Bank on the 29th January 2024. Others present were, Mr. Sekhar Rao, Mr. Gaurav Mehrotra, Mr. Amit Mandhanya, Mr. Vaddadi C., Ms. Sandhya Dhawan, Ms. Geetu Sehgal, Mr. Sumant Paul, Mr. Raghavendra Bavirisetty, Mr. Prasanna Kumar and Mr. Saisankar Narayan. Click here to read more: https://lnkd.in/dmgAb5SM

RBI has ordered banks & NBFCs to mandatorily issue Key Fact Statement(KFS) to retail & MSME borrowers. Read more 👇 2 years ago the mandate was only for digital lending, but now it’s made compulsory across all lending formats for the retail & MSME category. KFS is a document which mentions all the details of a loan in a standardised & easy to understand format. RBI has conveyed that the KFS should mention: -Loan amount, tenure, instalments, processing fee -Mechanisms of recovery & grievance redressal. -All-inclusive-APR, which means wholesome annual cost to be borne by the borrower. -Interest rate, processing fee,and all other charges. -Detail on penalties, etc. The RBI has mentioned that any fee/charge which isn’t mentioned in the KFS, cannot be collected from the borrower at any point of loan tenure. In case the bank doesn't provide the KFS or if any required detail is missing from it, the borrower may first approach the lender for redressal. In case of no resolution by the lender, the borrower can then reach out to the RBI ombudsman. There have been cases where lenders were penalised in such cases. Example: In 2023, RBI asked Bajaj Finance to stop the sanction and disbursal of loans under 2 of its lending products for not following the KFS guidelines. While this move will help retail & MSME borrowers to attain greater transparency for their borrowing needs, industry experts have welcomed the initiative stating that this would also promote a level playing field among lenders. What do you think about this move? Share your thoughts with us in the comments and repost for maximum awareness. RA disclaimer in comments section.

The RBI has ordered four non-bank financial companies (NBFCs), including Navi Finserv, an online lender, and DMI Finance, which owns the online lending platform ZestMoney, to halt lending operations effective October 21, 2024, citing concerns over excessive interest rates and predatory lending practice. The other NBFCs named in RBI's directive are Asirvad Micro Finance Limited and Arohan Financial Services Limited. The RBI's action stems from "material supervisory concerns" regarding the companies' pricing policies, specifically their Weighted Average Lending Rate and interest spread. These were found to be excessive and violated regulations of unsecured and microfinance loans. In addition to predatory pricing, the RBI found these NBFCs non-compliant with guidelines on income assessment, loan repayment obligations, and income recognition. Deviations were also noted in loan evergreening, gold loan portfolio conduct, disclosure requirements, and outsourcing practices. The RBI’s order puts both Navi and DMI Finance and other NBFCs in a tough spot. They can’t lend money anymore and need to fix things to get back on track. The RBI wants to make sure these lenders are treating borrowers fairly, especially those taking out small unsecured loans. The central bank also found that these NBFCs weren't following guidelines on things like checking borrower income and managing loan repayments. They need to fix these issues to show they can be trusted. The RBI has said that it will reconsider the restrictions if Navi and DMI can show they've made the necessary changes. But it won't be easy. Investors might get nervous, and other lending companies might take their customers. Strong MFIs are likely to take some market share in the interim!