Reserve Bank Governor Shaktikanta Das on Friday flagged concerns over mis-selling, lack of transparency and disproportionate service charges by various lending entities and called for review of working of their customer service and grievance redress mechanism.
He also cautioned against the mushrooming of digital lending apps, or DLAs, many of which do not abide by any regulations.
“In a large and vibrant financial system like ours, some level of complaints is understandable. What is of concern is that still a large number of complaints pertain to traditional banking. This calls for serious review of the working of the customer service and grievance redress mechanism in the regulated entities,” Das said while addressing the annual conference of RBI Ombudsmen in Jodhpur.
Stories in social-media about use of strong-arm tactics by some recovery agents overshadow the good work that is being done for customer protection, both by the regulated entities (banks, NBFCs, etc.) and the Reserve Bank, he said.
The statement comes almost a month after the RBI asked Mahindra & Mahindra Financial Services Ltd to cease carrying out any recovery or repossession activity through outsourcing arrangements after reports of a 27-year old pregnant woman in Jharkhand being allegedly crushed to death under a tractor by an external loan recovery agent of the NBFC.
The Governor said the role of the board and the top management of the regulated entities is very crucial in safeguarding customers’ interest and they should engage and ensure that there is customer centricity in the design of products, supporting processes, delivery mechanism of the products and post sales services.
According to him, commercial considerations are important, but they must necessarily be aligned with customer orientation in every aspect, including strategy and risk management.
Last year, the RBI replaced the three erstwhile ombudsmen schemes and introduced the Reserve Bank – Integrated Ombudsman Scheme (RB-IOS) 2021 on the vision of ‘One Nation, One Ombudsmen’.
Das said the RBI Ombudsmen and the regulated entities must identify the root causes of persisting customer complaints and take necessary systemic measures to correct them. Also, the resolution of customer complaints have to be fair and quick.
Noting that technology revolution has enhanced the efficiency of financial entities and resulted in significant improvement in doing business, the Governor said that it has also posed new challenges.
“It has opened the backdoor for unregulated technology players into the financial space. There is a mushrooming of digital lending apps or DLAs, many of which do not abide by any regulations or fair practice codes,” he said, adding that it leads to several concerns including mis-selling, breach of customer privacy, unfair business conduct, usurious interest rates and unethical loan recovery practices.
Initially, customers are tempted to borrow from these entities because of simplified or no documentation requirements followed by prompt disbursals but it is only later that the customers realise the serious downsides to such borrowings, Das added.
Last month, the RBI issued the guidelines on digital lending, which requires regulated entities to provide a key fact statement, or KFS, to the borrower before the execution of the contract.
The guidelines also stated that a borrower will be given an explicit option to exit digital loan by paying the principal and the proportionate interest without any penalty during a look-up period. For borrowers continuing with the loan even after the look-up period, pre-payment will continue to be allowed as per the RBI guidelines.