Context:
The Reserve Bank of India (RBI) has announced its intentions and strategies to conduct an evaluation and strengthen consumer education and protection in the retail credit sector. The move comes as the complaints about retail loans have risen sharply, especially at a time when the retail credit market is seeing explosive growth.
Retail Credit
Retail credit is the aggregate of consumer credit products and services, comprising loans, credit cards, and mortgage banking. Also, it incorporates business-to-business and business-to-consumer financing.
What are retail credit products and services?
- Credit cards
- This is one form of retail credit product.
- Mortgages
- This is also one type of retail credit product.
- Residential lending
- This is one more type of retail credit product.
- Personal loans
- A type of retail loan that can be used for a variety of personal expenses.
What are retail credit facilities?
- A type of loan or line of credit that can be used by retailers and real estate companies.
- A financing method that can provide capital for business needs or customer lending.
- A versatile financial instrument that can be structured with different types of debt.
Benefits of Retail Credit Facilities
- They can avail liquidity for numerous purposes.
- They may help to take care of operationary requirements.
- They may avail services of extending loan services.
- They may availed to arrange the credit account in a well-presentation format.
Key Highlights of RBI Annual Report FY24
- Low Complaint Levels Survey
- The CEPD would conduct a survey in FY25 to find out why the complaints from the rural and semiurban areas are relatively on the lower side that may indicate that redressal mechanism is not yet known to many.
- It will be upgradation based on the survey conducted on the complaint management system of RBI with greater consistency in the decisions and the outcome.
- Complaints Rise
- In FY24, the RBI Ombudsman and the Centralised Receipt and Processing Centre (CRPC) received 9,34,355 complaints that is a 3281 increase from the previous year. This means increased concerns on customer service and complaint handling in the banking sector.
- Complaints about retail credit especially unsecured loans account for a big portion of this increase which means a call for better protection mechanisms.
Retail Credit Landscape Problems
- Usurious Interest Rates
- Interest rates applied on loans have been termed by experts as usurious due to the surge in retail credit amongst low credit scoring customers. This poses a problem to new credit seekers.
- Retail lending comprises credit cards and personal loans, which are becoming gruelingly pricey. A huge proportion of the populace are facing expensive interest rates as well as fee costs.
- Consumer Protection Gaps
- There is a lacking dedicated body for mediating consumer disputes in the credit sector Even though the Banking Codes and Standards Board of India (BCSBI) used to fill this role it was dissolved in 2011, thus leaving a vacuum in the advocacy of consumers in retail lending.
Retail Credit Growth and Consumer Distress
- Retail Credit Growth
- The growth of retail credit is causing much concern as far as its ability to place consumers in bad financial behavior particularly with high levels of borrowing and the use of personal loans for speculative activities such as investing into IPOs.
- The retail loan portfolios experience significant write offs and particularly unsecured ones may raise suspicion of substandard lending practices such as dilution of underwriting standards
- Concerns with Fintech Lending
- Fintech lending has raised new issues. On one hand, fintechs have made loans accessible to young borrowers, but on the other hand, they also pose risks due to usurious rates and the fact that many of these borrowers are fresh to credit.
- The Fintech Association for Consumer Empowerment reports that volumes of fintech loans have fallen though the segment still accounts for a substantial portion of credit to younger less experienced borrowers.
