Interest rates to processing fee, RBI brings relief for loan app borrowers

The new rule book should bring down interest rates and improve recovery methods

The Reserve Bank of India’s (RBI’s) strictures on loan apps comes at a time when questions are being raised about app-based lenders using unethical practices, such as charging exorbitant interest rates, non-transparent methods to calculate interest, unauthorised use of personal data, and harsh recovery measures.  

The loan-on-tap industry has been thriving for a while, with over 550 lending start-ups in the market. And there are allegations that some charge over 5-6 per cent as processing fee, when the usual fee is 1-2 per cent. In addition, some charged interest rates up to 400 per cent or even more, if calculated on an annualised basis. Kunal Varma, co-founder, Money Tap says: “The regulator is trying to eliminate fly-by-night operators. Its focus on the fair practices code will force these apps to either comply or shut shop. It will ensure that the proper checks and balances are in place for these apps.”

For borrowers, the RBI’s latest guidelines mean more transparency, and possibly, less extortionist rates of interest. Typically, these digital lenders perform all the activities that a lender would do — sourcing customers, underwriting, servicing, and others. But they are not the actual lenders themselves. Arun Ramamurthy, credit advisory expert and author, says: “The customer doesn’t know who the actual lender is.” After the RBI’s intervention, banks and non-banking financial companies (NBFCs) will have to specify on their websites the online entities they are using to lend.

 

 

Pranjal Kamra, CEO, Finology, explains the problems that customers had to face in the earlier arrangement between banks/NBFCs and digital lenders. “These apps project themselves as product manufacturers (the actual lenders). But when grievances arose, customers felt cheated as they had to run after the NBFC (the original lender).”

This move will be a big help to customers as they can approach the lender, in case of any problem directly instead of going through the app. From here on, the name of the issuing bank/NBFC will have to be mentioned in the application form, the letterhead on which the loan is sanctioned, and other documents.

The RBI has also reiterated that banks and NBFCs, irrespective of whether they lend themselves or through an outsourced lending platform, must adhere to the Fair Practices Code guidelines. In future, if the fintech does not respond to customer’s grievances, they will be able to complain to the NBFC/bank. And if the latter also does not respond, they can complain to the banking ombudsman. 

On their part, customers should remain alert even in the future. Compare the interest rate you are being charged with that of other players. Convert the monthly rate to annualised for proper comparison. Also, check whether the interest being charged is diminishing or flat. With the former, you do not pay interest on the portion of the principal you have already repaid. Check the penalty for missed payments. They can be very high and are often not disclosed. Insist that the loan agreement should include the name of the underlying lender, if only the fintech company’s name is mentioned.