Loan disbursements took a hit due to the IL&FS crisis, but borrowers rejoice as loan rates get transparent in 2018.
Year 2018 saw a whole host of changes in the retail banking and fintech space that affected consumers. The Supreme Court restricted the use of Aadhaar for e-KYC while the RBI banned cryptocurrency and announced a regime to make loan pricing more transparent. Here are the key highlights.
Retail loans to get transparent
Probably the biggest reform to benefit banking customers came towards the end of the year. In the last monetary policy that the Reserve Bank of India (RBI) announced in early December, it said that all retail loans, including those given to small enterprises, will be benchmarked to an external rate. At the moment, home, auto and personal loans get benchmarked to an internal rate that banks fix (based on its marginal cost of funds) that includes a margin, which also your bank determines.
Effective April 2019, loans will now be benchmarked to an external rate. This will ensure that when interest rates in the economy go down, your loan rate will also move correspondingly. Besides, the margin (the spread over the benchmark) that your bank charges will remain fixed unless your credit habits have changed drastically.
This move will bring in more transparency; banks would be forced to reduce their loan rates in case interest rates move down, something that experts say wasn’t happening.
Mini Nair, Executive Director & CEO, Essel Finance Home Loans said: “This benefit can even be passed on to existing loan customers who would have a choice of shifting their loans to other banks in search for better rates. Even the new regime (post-April 2019) can give them better rates in their existing banks.”
Instant banking services halted due to e-KYC using Aadhaar stops
The Supreme Court order in September 2018 said it was not mandatory to link the Aadhaar number for opening a bank account.
Popular online opening mechanisms, such as through State Bank of India’s (SBI) 'You Only Need One' (YONO) app and Kotak Bank’s 811 stopped opening new accounts under the Aadhaar-based authentication system.
Further, in November 2018, National Payments Corporation of India (NPCI) suspended the eNach facility that used Aadhaar to validate the customers. To be sure, eNach is a facility that enables banking customers to make or receive regular payments from or to their bank accounts, such as interest payments or systematic investment plans of mutual funds where they wish to invest in, every month. This also hit the digital lenders who used eNach facility to enable customers pay back their loans.
Ritesh Pai – Chief Digital Officer, Yes Bank, said: “We expect costs of digital lenders to go up as they will now have to walk that extra mile to authenticate their customers.”
Experts believe this rise in costs will be passed on to the consumers. This has resulted in loan processing charges going up due to increased paperwork.
Ramaswamy Venkatachalam, Managing Director, India, FIS (company offering banking and payment solutions to banks): “I expect that banks will come up with new ways to authenticate their customers completely online, like the eKYC process that earlier used Aadhaar. The use of live videos is one such example.”
The credit crisis
Loan disbursements took a hit this year on the back of the credit crisis caused by Infrastructure Leasing & Financial Services’ (IL&FS) defaults. In September 2018, the firm along with its subsidiaries failed to repay their loans taken from mutual funds and other institutions.
There were fears that other non-banking financial firms, too, were in a sticky spot because banks reduced their funding to these NBFCs, further these NBFCs also tightened giving loans to customers.
Deo Shankar Tripathi, Managing Director & CEO, Aadhar Housing Finance said, “While the liquidity position has been gradually improving now but concerns remain for smaller housing finance companies/non-banking financial companies in 2019. Further, debt fundraising from capital markets may not come back soon to September 2018 level.”
Cards become more secure
Your debit and credit cards became more secure in 2018. The RBI asked all banks to replace magnetic-stripe-only cards with EMV chip-based cards by December 31, 2018. This is being done to reduce card duplication and fraud as chip-based cards are safer than those that come with magnetic strip.
Already, banks were issuing chip-based cards, but there were many customers who had magnetic cards as well. Navin Chandani, Chief Business Development Officer, BankBazaar explained, “Present magnetic stripe cards could be swiped on a card skimming device and its contents are downloaded and fed into a counterfeit card, thus creating clones of the original card. These clones are then used to carry out fraudulent transactions.”
Jan Dhan Yojana Scheme gets a boost
Launched in August 2014, the Pradhan Mantri Jan Dhan Yojana enhanced its offerings in 2018. With effect from September 2018, the government increased the accidental Insurance cover available with every such account, Rs.2 lakh, up from Rs 1 lakh earlier. Existing overdraft limit was also increased to Rs.10,000, up from Rs.5,000 earlier. Further customers up to the age of 65 can now avail of the overdraft facility, up from the age of 60 earlier. Also, no paperwork will now be required for overdraft availed up to Rs.2,000.
Pradeep Agarwal, CEO of financial and wealth advisory firm Meri Punji said, “This incentive will ensure that the benefits of the government schemes reach the beneficiaries with no intermediaries and also systemically regulate the flow of money into the economy.”
Some challenges in the PMJDY remain. “In order to get accidental insurance cover, there should not be any restriction like the debit card must be used at least once. Further, the number of free withdrawals in a month must be raised to at least seven to eight. This is because the existing limit on four withdrawals also include bank transfers made through internet banking, and not just cash withdrawn from its automated teller machine,” says Anil Rego, CEO and Founder, Right Horizons.
Ban on cryptocurrency
In April 2018, the RBI said it would bar all Indian banks from dealing with cryptocurrency exchanges and related firms. The order came through in July.
Over the course of the year, the prices of bitcoin fell under $4000 on the CoinDesk Bitcoin Price Index (BPI) in November 2018 against a peak price of nearly $20,000.
The RBI's decision to clamp down on the volatile crypto currency came at the right time as it closed avenues for Indian investors to invest in it. However, those investors who had already invested are stuck in cryptocurrency do not have a way to liquidate.
Rachit Chawla, Founder and CEO, Finway expects bitcoin prices to continue to trade lower. "Bitcoin doesn’t have any earnings or value behind it, the reason for increase in price was just speculation in 2017. We don’t see the price rising again."
"Crypto investors should act rationally instead of emotionally because unexpected price drops can anytime make you cry,” he added as a word of caution.Follow @thanawala_hiralYou can now invest in mutual funds with moneycontrol. Download moneycontrol transact app. A dedicated app to explore, research and buy mutual funds.