Transparent loans is need of the hour

New Delhi: Harsha Vardan Roongta, CEO of Apnaloan.com says that tax incentives on loan repayments are fairly substantial but consumers could do with guidelines for fair lending practices.

Its that time of the year again when all industry associations send their wishes to Santa Claus (c/o North Block, New Delhi) and await his response on the B- Day. Let me make a similar wish list on behalf of the millions of retail loan consumers in India who unfortunately do not have a strong association.

Firstly I think the finance minister has already been fairly kind in terms of tax incentives on loan repayments and there are very little expectations on that front (Off course one hopes that Santa is not planning to take away some of the existing goodies).

What the consumers would really welcome is a statute enabled regulatory environment that addresses the serious issues and concerns that loan consumers are now beginning to confront. Let me list the areas that require the Government’s immediate attention.

Firstly we have the issue of misleading loan agreements/practices that hide more than what they reveal. Most loan agreements are riddled with non-transparent interest rates (variable/adjustable rates that adjust/vary only upwards with the consumer having to fight to get reductions), hidden charges (most agreements have blank spaces to specify the pre-payment charges or upfront fees or provide for charges payable as per the undisclosed prevailing rate card of the bank) and more such horrors.

Thankfully predatory loan pricing (very high interest rate loans – the modern equivalent of the village moneylenders made famous by Hindi Cinema) is still in its infancy in India with only a small portion of personal loans being sold at interest rates as high as 50-55 per cent p.a. by some very venerable foreign banks (and now being aped by the more aggressive local private banks) who would never dare do the same without full disclosures back in their home countries.

What is needed therefore is a full-fledged fair lending practices act requiring transparent, simple and comparable (across banks) disclosure of the main terms of the loan agreement and stringent penalties (especially for repeated offences) and damages for non-compliance. RBI has already framed guidelines for some of these issues.

However, in the absence of a specific law, even these limited guidelines are not being fully implemented by some of the banks, confident that any violations would at the most result in a slap on the wrist and a small fine.

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Secondly another major issue is the non-transparency in reporting to the credit bureau. Anybody who has had a dispute with the bank on unjustified charges levied on a loan/credit card account (and there are legions of such consumers) or non credit/delayed credit of payment already made will testify that the bank’s lending and accounting systems are far from perfect. Till now he at least could dig in his heels and refuse to pay these unjustified charges.

Now non-payment of these disputed charges will result in the bank reporting it as a default to the credit bureau, which in turn will negatively affect the consumer’s ability to get any future credit.

The consumer will have no other choice but to pay up these unjustified charges or take the lender to a civil court which is a time consuming and lengthy affair. In fact can you imagine the horror of being reported to the credit bureau as a defaulter for non-payment of annual fees on an unused credit card sent to you on an unsolicited basis by the bank? Sure RBI has guidelines for this but such kind of wrong reporting should, by law, involve clearly laid out penalties including damages.

Thirdly the other area of concern is the extra legal collections mechanism adopted by most foreign banks and private sector banks. Again RBI has guidelines on this but it is common knowledge that the more aggressive banks violate the spirit of these guidelines on a fairly wide scale basis.

Mr Santa Claus sir (Mr Finance Minister) the Indian retail loan consumers (as distinct from the corporate borrowers who can and sometimes do use every trick in the book to a repayment of loans) have repayment track records that compare with the best in the world. I think they are fully justified in expecting some goodies (read specific laws) that the other such consumers in the world already have (after all borrowing concepts from advanced economies cannot be limited only to things like FBT) to safeguard their interests.