Banking Central | What blips on RBI radar as it frames fresh set of lending norms?

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While announcing the bi-monthly monetary policy review last week, Reserve Bank of India (RBI) Governor Shaktikanta Das took a few steps to firm up the leash on fintechs and digital lending operations.

Among them was the proposal to bring loan aggregation services offered by the Lending Service Providers (LSPs) under a comprehensive regulatory framework. In simple terms, web aggregation means aggregation of loan offers from multiple lenders on an electronic platform which enables the borrowers to compare and choose the best available option to avail loan from one of the available lenders. The RBI has clearly communicated the purpose of proposed additional regulations on web aggregation.

These norms will focus on enhancing transparency in the operations of such service providers, increase customer centricity and enable borrowers to make informed choices. These rules are welcome as it will enable more transparency in web aggregator’s operations.

In recent years, the number of digital lenders have increased significantly. Wrong practices that some of these lenders follow have caused distress for borrowers that often led to severe results like committing suicides. Hence, the rationale behind the regulator’s action isn’t hard to understand.

The second key announcement, which is perhaps even more important, is the introduction of a fresh framework on connected lending. Connected lending, as the RBI has defined it, is lending to people who are in a position to control or influence the decision of a lender. The central bank thinks this

could be a cause for concern if the lender does not maintain an arm’s length relationship with such borrowers. Such lending can involve moral hazard issues leading to compromise in pricing and credit management, the RBI has said.

Of late, there have been many instances where the RBI has penalised banks for violations in following the lending rules. Such cases are more prominent among cooperative banks and some NBFCs (non-banking finance companies) where loans to parties related to powerful board members on the board has become a recurring practice. The central bank has clamped down heavily on such banks periodically announcing penal actions. It looks like the intention of the latest proposed rules is to target these entities and force them follow good governance and lending practices.

A number of cases have been reported recently where the erring banks and non-banks have faced the regulator’s wrath for rule violations. The RBI has cancelled the permits of more than 10 cooperative banks and many NBFCs, citing governance lapses and major deviations from regulatory compliance. A common theme in all these cases have been failures on the part of the board to ensure good corporate governance practices.

Probably, the central bank is not comfortable with the pattern of more and more such cases occurring despite repeated warnings and penal actions and, hence, wants to bring in a fresh set of rules.

To sum it up, the RBI actions in both the cases are more pre-emptive in nature to avoid a bigger calamity in the banking system. As the governor said, the central bank doesn’t wait for the house to catch fire before it acts.

Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.