RBI flags NBFCs’ ‘growth at any cost’ approach: Retail borrowers would do well to heed the message

Online festive sales

Ahead of the Dushera and Diwali, Reserve Bank of India (RBI) governor Shaktikanta Das struck a note of caution on retail loans extended by "some" non-banking financial companies (NBFCs).

“It is observed that some NBFCs are aggressively pursuing growth without building up sustainable business practices and risk management frameworks, commensurate with the scale and complexity of their portfolio. An imprudent ‘growth at any cost’ approach would be counter-productive for their own health,” he said in his monetary policy address on October 9.

He expressed concerns around lending practices adopted by certain NBFCs, which results in business driving retail credit growth rather than its actual demand. While his message was meant for the NBFCs, retail borrowers can ignore the note of caution at their own peril.

At a time when it’s raining offers in the online as well as physical world, it is easy to succumb to temptations to borrow and buy gadgets or appliances that would otherwise be beyond your means.

Spending indiscriminately not the only way to celebrate 

'Tis the season for a splurge. Or so brands, e-commerce portals, and retail chains would have you believe.

With deep discounts, flash sales, early-bird discounts, and time-sensitive coupons driving the shopping frenzy, sobering advice on why euphoria should not outstrip your spending capacity is short in supply.

It is indeed the time to indulge, no doubt, but the key lies in responsible spending. It is best if your splurges are pre-planned, based on what you genuinely need, and not because of eye-popping rebates.

Here are four suggestions to overcome the urge to overspend this festive season:

Draw up a budget and stick to it

Consumer durables companies, fashion and electronics brands, and e-commerce sites typically start getting Indian consumers to loosen their purse strings from September, which marks the onset of the festive season.

So, before all the excitement descends on your mobile phones, social media platforms, television screens, and newspapers, you must chalk out a festive shopping budget. Earmark the products that you genuinely need and can afford out of your savings. Stick to this budget and do not allow ‘attractive’ offers to determine your purchases. Not having a budget in place could result in a situation where you end up buying products that you don’t really need.

Also read: Festive sale frenzy: 5 online shopping traps to avoid this season

Plan ahead to fund purchases

If you need to make a big-ticket purchase such as an iPhone, laptop, or the latest gadget, plan in advance to create a corpus for the purpose. It is best to start setting aside a particular sum every month right from the beginning of the financial year — from April itself — instead of scrolling through sales offers and making impulse purchases.

Use the credit card as a spending tool, accumulate rewards

While the use of UPI (unified payment interface) has grown exponentially over the years, the credit card is often the tool of choice for big-ticket spends. This is because of the offers (read discounts) they have for their users, and also the reward points they earn on spends, which can be redeemed against other purchases, hotel and flight bookings, and so on.

However, you must use credit cards only if you are confident that you can pay off the bill on the due date. Any delayed payment or clearing just the minimum amount due could be disastrous for your finances. For one, it will adversely affect your credit score, jeopardising your ability to secure other, more important forms of credit such as home loans in the future. Secondly, given that the interest on overdue credit card bills exceeds 39-44 percent per annum, paying just the minimum amount due will land you in a debt trap.

Also read: Festive shopping: 7 tips to make the best of 'handsome' offers

Avoid BNPL or personal loans

Like credit cards, buy-now-pay-later (BNPL) schemes enable affordability.  Here, all the purchases during a billing-cycle get totted up, and you can pay later. A consumer can also make small-value transactions using this scheme. The repayment period can range from 14  to 30 days, or there can be an EMI-based repayment tenure of 3-12 months. The options vary depending on the vendor, product, and transaction value.

This apart, personal loans are also a form of unsecured credit which come with high interest rates of over 15 percent, depending on your credit score.

Both in the case of BNPL schemes and personal loans, any default or delayed payments will result in  a defaulter tag and his credit score  will be affected.