- 3 years ago
In conversation with Vishwanath Nair, FIDC Director Raman Aggarwal talks about RBI's recent reforms on penal charges for loans and how it will affect lenders. #BQLive
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00:00 Hello and welcome to BQ Prime. You are joining us on this special broadcast where we are
00:03 discussing the Reserve Bank of India's latest norms around penal charges that banks and
00:08 other lenders can levy on their borrowers. Now, the guidelines that the RBI is referring
00:13 to is the Fair Lending Practices Code of the Reserve Bank of India and this applies to
00:18 banks, NBFCs or any other kind of lender that the Reserve Bank of India regulates. To discuss
00:23 this topic in detail, we are joined with Mr. Raman Agarwal from FIDC. Mr. Agarwal, welcome
00:29 to this conversation. Thank you so much for taking time out talking to us.
00:34 Thank you and thank you for having me on the show.
00:36 Mr. Agarwal, let me start with the first question. Now, the point that the RBI is trying to make
00:41 in these guidelines is that these penal charges or any kind of penalty that is levied by a
00:48 lender to its borrower is meant as a punitive measure and is not a revenue-seeking opportunity,
00:55 which what the RBI sees is that that has become the norm because you keep charging penal interest
01:01 over and above the penalty itself and that keeps adding up. Even in the Finance Ministry's
01:07 response in the Rajya Sabha, one of the points that was mentioned is that Rs. 35,000 crore
01:11 roughly has been collected over five years between 2018 and 2023 by the banking system
01:17 and this is just the banks. We are not even looking at the NBFCs here. But Mr. Agarwal,
01:21 I would just want to get a sense from you as to how does a lender see this when you
01:25 are taking away the right to levy any kind of interest on the penalties?
01:30 So, see Vishnath, I think we need to understand this in the whole perspective. So, there are
01:37 two aspects to it. One, of course, we need to appreciate the fact that yes, there should
01:44 not be any undue practices or unreasonable charging of any charges or interest to the
01:50 borrowers. That's something which is unique and universal and nobody can question that
01:57 and we as lenders are fully aware of that, fully responsible. Having said that, we also
02:02 need to appreciate the fact that whatever we are calling it here, I'm restraining from
02:09 calling it charges as of now. Let's appreciate that this whole is basically a factor of time,
02:16 the time value of money. Now, I borrow money from you and for some reason, I'm not able
02:23 to pay on the due date, there is a delay. So, whether you call it a default, I think
02:27 we prefer calling it a delay. There is a delay which happens. Now, since there is a time
02:32 value of money, so whatever is the delay, proportionately, there has to be some amount
02:37 of interest paid off. Now, by nature, this has always been accounted for and treated
02:46 as an interest. We need to understand this very clearly. Now, the moment you call it
02:52 a charge, the whole nature changes. That means it is no longer a component of interest, it
03:00 is a charge, it's a fee, which you are charging because of the delay happening. Now, why I
03:06 am saying this is important is because we never, you would recollect that the draft
03:11 circular was issued in April and based on that FIDC had made a representation and this
03:16 is exactly what we said, that let us not change the nature. We appreciate that one side, we
03:23 will come to that. But let us not change the nature of this levy because the moment you
03:28 change the nature from an interest to a charge, there is an immediate implication of GST.
03:35 Now, the moment you put a charge, there is going to be a GST level. So, to expect the
03:42 borrower, somebody who's delayed his payments to pay the charge and also pay the relevant
03:47 concern GST will be a tough ask, number one. Number two, what you're doing here is by changing
03:54 the nature, you are making it a fixed rigid proposition. Let me also tell you one very
04:00 important practical side of it, which at least we in the NBFC sector have followed all these
04:06 years. Whatever this so-called penal interest or charges, whatever you call it, is always
04:12 leveled in the memoranda account and is actually recovered from the borrower at the time of
04:18 settlement. And many a times when, you know, obviously when the borrower comes for settlement,
04:23 there is some kind of a negotiation that happens. Many a times we have seen that these are waves,
04:29 all together waves or if not waves, some hefty amount of cut is given, say 30%, 50%, 60%
04:36 cut is given. But that will no longer be possible now, because it's a fixed charge with GST,
04:43 the moment that is done, you cannot alter that. So, these are two very key elements
04:47 which you also need to appreciate. I think that's what we've said, that we can talk about
04:53 the concerns of the borrower, how to address them. But let us retain this nature as an
04:59 interest and let us not call it a charge. That's our argument number one.
05:04 Okay, I'll break this up into two parts. But first, let me tackle this interest versus
05:10 charge question. Now, what exactly changes for the borrower, if you charge a penal interest
05:17 or if you're putting a penal charge, the end customer doesn't really, I mean, that person
05:24 has to still pay a penalty for non-compliance. I mean, that doesn't change anything for them.
05:28 It's only the lender side of the story that changes, right? That's what you're referring
05:32 to.
05:33 No, but there is one element I brought in, you know, from the borrower's perspective,
05:37 the GST part, as long as it was an interest, there was a possibility of a waiver or a cut
05:43 happening, which will no longer be possible now, because the moment you charge GST, you've
05:48 deposited the GST, you cannot change it.
05:50 Wouldn't you say that the RBI is trying to remove any kind of discretionary decision
05:57 making in this part and is looking to make a flat decision making process?
06:02 So exactly. So that's why I began by saying that let's not mix the two, let's segregate
06:07 the two. Now let's come to the concerns which RBI has expressed. Those concerns we fully
06:12 appreciate and if you ask me, we agree. The concerns are there. Why? It's a simple fact
06:18 because this was an area which was left open grade, there was no specific instruction.
06:24 So obviously, every lender was following its own policy. Somebody was charging X amount,
06:29 somebody was charging Y amount. And yes, I mean, I admit it could be in many cases, it
06:34 could have been very high, I mean, which was not called for. So yes, there was a need and
06:40 there is a crying need to bring in a standardization. That is very important. Or what we even said
06:46 in our presentation is that you retain the nature in interest and you could very well
06:51 discapitate. For example, RBI in India has also mentioned that okay, let this rate not
06:58 exceed the contractual rate of interest. So there was ways and means of addressing concerns
07:05 as I once again, I repeat, we fully appreciate and agree with RBI's viewpoint that there
07:10 are concerns, there is a need to bring in standardization from the borrower's perspective
07:14 and from the regulator's perspective. But to do this, let us not change the nature.
07:20 That's my point. Okay, we can do it retaining it as an interest.
07:24 Okay, apart from the tax components, what is the benefit to the end borrower, if you
07:29 retain the nature of penalties as they are today?
07:32 So as I said, foremost, no, no leeway for any discount or anything happening now, the
07:39 moment we call it a charge. That's number one. I mean, the key point I would say, right
07:43 from the borrower's perspective. Now, if you I will slightly digress here. Now remember
07:48 the COVID era, and we all know there was a huge debate and litigation that happened around
07:55 on the interest on the moratorium period, you may remember that. And it was also an
07:59 interest on interest. Yeah, the matter went right up to the Supreme Court. And you would
08:04 recollect and rightly so that all banks, all NBST, RBI and the government of the day took
08:12 a stance that yes, this has to be the interest because there is a time value of money. See,
08:18 we conveniently forget the liability side. What about the liability which I'm saying
08:23 which deposit in case of banks and in some of the NBSTs are accepting? Can you tell if
08:28 at all, I mean, normally doesn't happen. Suppose there is a delay in repayment of those
08:32 deposits with interest. Can you tell the depositor I will not pay you the interest, I will pay
08:37 you some charge? Yeah, no. It has to be a time value. So commensurate and that is the
08:42 stance which was taken at that point. Both RBI and ministry took that stance that it
08:47 has to be an interest because there is a time value. So that's the point I'm bringing in
08:52 again here that let's not change the nature. But yes, I agree, there is a need to recap
08:58 it or bring in some kind of a standard. How would you go about that capping because
09:03 the RBI in its guidelines is very clear that certain products have to have the same kind
09:10 of penalty, you can't randomly decide a penalty has changed because a product A has been decided
09:15 over product B. The other part that the RBI is very clear is that you have to have a board
09:20 approved policy. So it has to be a uniform process applicable across the borrower base.
09:24 And that you can't charge more than what you charge your non individual customers,
09:29 you can't charge retail customers like corporate customers you do. I think the I think the
09:35 crux of the discussion comes up to that, right? Because this system that has existed where
09:41 everybody decides for themselves and they do what they feel like has led to this situation where
09:47 the arguments are making a fair, but the effective charge has been has become untenable for a
09:53 customer. No, agreed. So as I said, there is one simple way could be you cap it that okay,
09:58 do not exceed the contractual rate. Now that will take care because product wise,
10:03 entity wise, obviously, NVFC lending rates are higher than banks because our borrowing cost is
10:07 higher. Similarly, product wise, the interest rates could vary. Interest rates could also vary
10:12 based on the various risk profile of the board. That's very important element, right? So I think
10:17 to cap it, for example, you say, okay, don't exceed your contractual interest,
10:21 contractual rate of interest. Simple, it's done. So I think let's, and then there is one more
10:28 element, you know, in this circular, apart from the issue of charge versus interest thing, which
10:33 I raised, there is also an element of what you can call some kind of a retrospectivity to the
10:39 extent that this will now also apply to the existing loan. Now let's appreciate that the
10:44 majority, at least I speak for the NVFC sector, a vast majority except for housing loans,
10:50 vast majority of the loans, in fact, more than 90% given by NVFCs are fixed rate loans,
10:55 fixed rate loans, short tenure loans for anywhere two to five years, right? Now in such case,
11:01 to expect this change to happen on the existing loans also is going to have a very dampening
11:09 impact because you know, the whole equation changes. So this should not be applied to the
11:14 existing loans, at least for the fixed rate short tenure loans. I agree the long term housing loans
11:20 or long term loans, which are floating rates, which are benchmarked against the external rates,
11:25 fine. I mean, there is a need, but short term tenure fixed rate loans, existing loans should
11:30 not be discussed. This is again, would change the whole equation. So these are two key
11:34 asks or requests we are going to make to RBI. We are still debating and discussing. We will be
11:42 having our meeting also shortly. We'll take a call on that. You've got about four months before
11:47 the guidelines come into effect. The January 1st is what the RBI has said. They said that the
11:54 existing loans, it will take into effect six months after that. So basically, first July,
11:59 first July onwards, all existing loans get covered. Yeah. How much of a hit would that be for
12:05 the banking or well, the NBFC ecosystem, if these guidelines go through as they are in the current
12:13 shape? I'll tell you what, I don't think if you ask me in terms of the financials is going to be
12:19 a very big hit. No, I think let's not, I would say that to say that, at least for NBFC, again,
12:26 I can say for confidently that to say that NBFC were making huge profits out of this element is,
12:32 I think, probably would be stressing things too much. Yes, I mean, there could be stray cases
12:38 that this may be happening. So I don't think this taking a big hit on the actual financials of the
12:43 sector, I mean, that remains robust. However, there are going to be operational issues. If you
12:48 do it on existing loans, there are going to be operational concerns. I think that will equally
12:53 be in the case of borrowers and the lenders. So as I said, because as a practice, these are
12:59 kept in the memoranda account and actually charged at the time of settlement. Now, the moment you
13:03 change it to a charge, so what will happen to the past? That is an equation which we need to sort.
13:10 There will be more often operational issues. Similarly, when I said GST element coming in,
13:15 so you cannot alter it or give you any discount or waiver. And what if the borrower doesn't pay
13:21 the GST amount? I mean, he just pays the overdue charges. He says, fine, I'll pay this charge,
13:26 not the GST. Then who's going to pay? So that's going to go from our pocket, the lender's pocket.
13:31 So there is going to be more of an operational issue, not a very big financial impact. Yes,
13:36 there will be an impact, but not something which should cause any worry or ripples in the system.
13:41 All right. Last question from my side, Mr. Agarwal. I just wanted to get a sense from you as
13:46 to the confusion that has come up in these guidelines. Where do you think this started
13:53 from, this conversation of controlling penal interest versus penal charges? Because the
13:58 RBI usually starts the conversation because somebody else or somebody within the RBI brings
14:03 it up as a problem. But was this something that the NBFC industry or the banking industry pointed out
14:07 as an issue which needed guidelines? No, I think if you read the circular,
14:13 they've given a hint. So they're saying this during the course of supervision.
14:17 So they mentioned that. So obviously, what does that mean? RBI has two elements of supervision,
14:23 offsite and onsite. So offsite supervision is by way of returns, etc. The details which we file to
14:28 RBI on a monthly, quarterly, half yearly, and annual basis, and the onsite inspections which
14:34 are carried out. So maybe during the course of that, they came up with this and they found out
14:39 that in some cases, it could be very high. And yes, obviously, that element was there,
14:43 that there was no standardization, everybody was charging on its own. So I think it was during that
14:48 course that it came up. I'll tell you why I'm asking you this, because it seems a lot like
14:53 the problems that came from the digital lending ecosystem, because that became a real issue,
14:57 just about a year ago, where people are being charged with hefty penalties, which was
15:08 increasing the loan amount by 100x. And that didn't quite make sense to anybody.
15:13 I appreciate your point and where you're coming from. Let's also appreciate the moment you compare
15:21 the today's banks or NBFCs even with the digital lending concern. There, the major concern was that
15:30 majority of those lenders are unregulated entities. So then any unregulated entity charging
15:36 any amount of interest is something which obviously caused the lump debt. Whereas in case of NBFCs and
15:41 banks, we are all very well regulated part of that ecosystem. And today to say that somebody is
15:47 charging very high rates of interest, let's appreciate if the market is so active and
15:52 dynamic today that that entity will automatically go out of business, it will start charging
15:57 anything which is out of. So market and that's the reason why RBI has openly and very rightly so
16:04 maintained this viewpoint that they are against regulating or capping of lending rates. That's
16:10 exactly because the market is dynamic, the regulator is dynamic, they keep changing,
16:14 they keep altering the rates, the policy rates depending on the situation. We've seen in the
16:20 past that some excellent work has been done by RBI and even the Ministry of the Government of
16:26 the day, they've supported fully. So I think all that is well taken care of those concerns primarily
16:33 arise out of entities which are themselves not regulated or under regulated.
16:38 Okay, Mr. Agarwal, thank you so much for joining us. We'll leave it at that.
16:41 Pleasure talking to you, sir. Thank you.
16:51 [BLANK_AUDIO]
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