Stronger Banks Navigate Challenges As They Are Well-capitalised: Raj Khosla, MyMoneyMantra

Recently, the Reserve Bank of India (RBI) increased the risk weight from 100 per cent to 125 per cent. What is your take on this?
 Our regulator, in this case, the RBI, has consistently acted in our best interest. This recent adjustment is no exception. They acted promptly and decisively. Going further, considering our extensive database with 64 million active consumers, we conducted a survey on personal loans, specifically focusing on the end use. We analysed end-users, observing a shift post-Covid in smaller unsecured loans. Before, funds were often used for education abroad, but during the pandemic, the usage shifted to more immediate needs like school fees, basic expenses or repaying personal loans from relatives. The end use changed notably after Covid, specially in the case of smaller ticket loans, such as Rs 30,000 or Rs 40,000 loans, which are also unsecured.
 
Recognising the evolving situation and the potential risk to portfolios, the RBI, in a pre-emptive move, introduced new regulations.
 
Before the pandemic, the credit risk used to be 125 percentage points. However, during the outbreak of the pandemic, it was decreased to 100 percentage points. Now, the RBI has once again increased the risk weight. Can we consider that the recent guideline is simply a reset to the previous position?
During the pandemic, measures like decreasing the risk weight were part of economic stimulus efforts. Now, with rising inflation, the RBI must balance and avoid excessive stimulus, necessitating a correction in policies.

Experts predict that with the recent change in risk weight, banks may limit lending in credit cards or personal loans. Do you agree?
RBI has acted in the best interest of the ecosystem as a whole. It's not just about either the lenders or the borrowers; it serves the purpose of both. The organisations or lenders at the lower end of the ladder, such as non-banking financial companies (NBFCs) or fintech, which are less well-capitalised, are not strong to start with. They make loans with high interest rates, which they are likely not to recover. The stronger banks will also face some difficulties, but it won't be too much and they will be able to manage since they are well-capitalised. They will be lending within the overall umbrella of capitalisation, which is what banking is about. It serves the best interests of the customer and also the bank. In case of stress, the bank will immediately stop issuing new loans. It will say, 'Let me sort out my problem first because my portfolio is tanking; new customers I'll see later.

Big banks, well-capitalised and in a good position to lend, may see a rise in unsecured loans. Are they equipped to manage this?
Yes, big banks, being better capitalised, can absorb losses and act swiftly to prevent any significant impact on their business or borrowers. However, smaller organisations or those less capitalised may face challenges and may cease operations under stress.

It has been observed that banks and NBFCs impose penal rates of interest, over and above the applicable interest rates, in case of defaults or non-compliance by the borrower with the terms on which credit facilities were sanctioned. As cited by the RBI, this leads to penal interest but not a penal charge. It becomes a source of revenue for the banks, but the customer suffers without having the proper information. What is your take on this?
This is quite simple. You know, that Greek term, Caveat emptor—let the buyer beware and be responsible for checking the quality and suitability of goods before making a purchase. The customer might argue that there was a small print size, but he or she should have read it or should not have been so undisciplined. All these are very harsh things to say to somebody who has to repay a loan, interest, and penal charges, especially considering the customer is already going through so much stress. But the question remains: Is the bank doing anything illegal? No, it is not. But, is it fair? That is the actual question.

When there is an increase in the repo rate, banks raise the interest rates without informing the customers. However, when there is a decrease in the repo rate, the benefit is not passed on, and the customer has to fill out a form that costs, say Rs 1000 or more. So, why this discrepancy and what is your take on this?
Banks are well within their rights to state that you have to pay Rs 1000 as a processing fee because they are making some changes. If I were a consumer, I would firmly assert my rights and say, 'I'm not paying this since getting this service is my right. Hence, I'm not paying any processing charges; that's your job.' Now, moving on to the second part of the question: Suppose the repo rate comes down by 100 basis points and therefore, the bank also has to reduce your rate of interest. You can go to the bank and request a reduction in your EMI while keeping your loan tenure constant. Alternatively, you can ask them not to reduce your EMI but to reduce your tenure. Depending on your personal preference and ability to continue paying the same amount, you can choose to either reduce the EMI or the tenure.
 
RBI allows banks and customers to switch benchmark rates. How does this impact lending?
With the shift to the repo rate as the benchmark, customers have the flexibility to switch lenders if the current one doesn't pass on rate benefits. This ensures fair treatment for customers.

In your decades-long experience, how has the lending business changed?
Well, there have been numerous changes in the landscape and it has transformed significantly. But when you ask about the most significant change, I would say it is the credit bureau. Until about the last 10 years or so, there were no credit bureaus. Everyone was conducting credit appraisals one by one and banks were hesitant to share information. They weren't even sharing information with the central bank. However, now all banks are required to share information in a single repository to establish a successful credit bureau. This allows a new lender to log on and check, for example, Raj Khosla's credit history and assess how good it is or if he has any credit history at all. The absorption of technology has also evolved with online mortgage loans being a prime example.