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<div type="image" title="The RBI has cracked the regulatory whip on NBFCs and banks, who&amp;#39;ve been pushing microfinance and unsecured loans aggressively to grow their loan books." agency="ANI" msid="114778648" hostid="261" caption="&amp;lt;p&amp;gt;The RBI has cracked the regulatory whip on NBFCs and banks, who&amp;#39;ve been pushing microfinance and unsecured loans aggressively to grow their loan books.&amp;lt;/p&amp;gt;"></div> Imagine this. You have a younger sibling you’re mighty envious of. And why not? Unlike you, they seem to enjoy all the freedom and money in the world. They party like there’s no tomorrow, and here you are, stuck in a boring, ultra-disciplined but responsible routine that feels completely devoid of any independence, and mostly, funds. But of late, things are changing. This sibling is in massive trouble and just cannot escape the parent’s wrath anymore. Long story short, the party is over, and it is time to go back home. The rising defaults on this sibling’s part have now begun pulling the entire house down, thereby attracting the regulator’s ire. <h2>The Wild West of <keyword id="113684" type="General" weightage="20" keywordseo="microfinance" source="Orion">microfinance</keyword> and unsecured loans</h2>It's hard to ignore the issues with microfinance and unsecured loans in India. Many saw them as a small gamble and ignored the rising defaults much like the younger siblings’ tantrums, and now they find themselves in hot waters. The skyrocketing instances of non-payments aren't a micro-issue anymore and are threatening the stability of the entire banking system. In the quarter ended September 30, 2024, 5 of India’s 8 largest private sector <keyword id="19934118" type="General" weightage="20" keywordseo="banks" source="keywords">banks</keyword> reported a steep rise in their bad loan book, mostly thanks to microfinance loans. Some banks, in a bid to strengthen their fortress against these <keyword id="142154" type="General" weightage="100" keywordseo="bad-loans" source="Orion">bad loans</keyword>, have significantly upped their provisions. For instance, IndusInd Bank set aside Rs 525 crore during July and September 2024 to battle the menace of defaults on microfinance loans, which make up about 9% of its total loan book. See, banks rely heavily on their interest income, which they earn from advancing loans. Any loan where the borrower has not paid interest to the bank or defaulted for 90 days or more becomes bad, i.e. an NPA, or non-performing asset for the bank. And who likes things going bad? Simply put, there has been a steep rise in three areas, much to the dislike of banks and MFIs (micro-finance institutions). But hey, it's mostly their doing! <ol><li>GNPA ratio (gross net performing assets): The quantum of non-performing assets a bank has in proportion to its total assets.</li><li>Provision: The amount banks set aside to take care of such NPAs.</li><li>Slippage ratio: The rate at which good girls go bad, or the speed at which good loans turn into NPAs</li></ol>But how are these plaguing the Indian banking sector? And what does the road ahead look like? We decode it for you. <h2> Microfinance: A not-so-micro-menace</h2>Microfinance loans were initially brought forth for low-income households and individuals i.e. for those who might not generally have access to traditional ways of credit, like bank loans and more. They don’t require collateral or an asset to be pledged in lieu of the loan, making it a tad bit easier for borrowers. As of June 2024, the amount of outstanding loans in the microfinance industry stood at a staggering Rs 4,20,256 crore. Of this, NBFC-MFIs accounted for 40% and banks made for 33% of these. In 2022, RBI, in a bid to inspire some competition in this space, did something radical-they did away with the ceiling on how much interest MFIs could charge their customers. Previously, MFIs could add up to 12% to their cost of acquiring funds to determine the final interest rate chargeable to the consumer. So, assuming that Bank A incurs a 5% cost to acquire funds for further loaning, A could charge up to 17% interest from the end consumer. So, interest rates were in the hands of MFIs, and boy, did they have a gala time with it. Instead of spurring some healthy competition, as RBI expected, MFIs and banks went rogue and all guns blazing, competing for the title of “Who will charge the highest interest?” Recently, RBI banned 4 microfinance institutions (MFIs), namely Asirvad Micro Finance Limited, Arohan Financial Services Limited, DMI Finance Private Limited, and <keyword id="20117932" type="General" weightage="20" keywordseo="navi-finserv" source="keywords">Navi Finserv</keyword> from disbursing loans effective October 21, 2024. Why? Because they were charging 14% extra interest over their original cost of funds. To maintain their loan books (and pockets), banks and NBFCs resorted to shady practices like netting off loans, which RBI has now advised MFIs against. Here, lenders allow borrowers to settle a previous outstanding loan by issuing them a new loan! As crazy as it sounds, it helped banks to report less of their total assets as NPAs, since the new credit would cover pending instalments of the borrower’s previous loan. Then there was the issue of borrowers overleveraging, i.e. taking multiple loans using different IDs from various lenders and then failing to honour any of them. The consequence? Banks and NBFCs end up with massive NPAs. Data from credit bureaus suggests that over the last quarter, there was a 17.2% rise in the number of borrowers who had 5 or more active loans at the same time. <h2>Growth &gt; Caution</h2>It's an age-old tale unfolding yet again in India’s banking sector- Icarus flew too close to the sun and eventually, fell to its death. Between April and June 2024, NBFCs microfinance portfolio jumped by 2.7%. If you see this in terms of loan sources, microfinance loans issued by banks grew by 11.2% in Q1FY25. But the same portfolio in NBFCs swelled by almost double-23.9%. While most of these loans had an average ticket size between Rs 30,000-50,000, there was a sharp spike in the number of loans that had a ticket size of Rs 80,000 or more. Data suggests that as of March 2024, more than 12% of all microfinance borrowers had over 4 or more active loans. In dating parlance, this is a classic case of borrowers going polyamorous, minus the honesty and transparency. Not the best of situations, you'd agree! <h2>Will banks and NBFCs stand up to this stress?</h2>If their results for Q2FY25 are to be believed, NBFCs are not handling the pressure all that well. Or even slightly well. Only a few banks like Bank of Baroda (BoB), ICICI, and Indian Bank were up for the battle, even witnessing a decline in their loan delinquencies. Some others, like IndusInd Bank, saw their stock dip by a massive 16.2% over the last 5 days. Its slippages in the previous quarter burgeoned from Rs 15.3 billion in Q1FY25 to Rs 17.9 billion in Q2. As a result, the bank pushed a staggeringly high amount of money to create an NPA cushion for itself. While its management has highlighted its preference for secured lending, that was hardly reflected in its actions during the quarter, where growth in unsecured personal loans remained exceptionally high at over 7% on a QoQ basis. Turns out, only 44% of customers in IndusInd Banks’ microfinance loan portfolio were exclusive to it. The rest 47% were, you guessed it right-polyamorous! 27% had borrowed from another lender as well, apart from IndusInd Bank, while 20% were those who had outstanding loans with two other lenders, apart from IndusInd Bank. IndusInd Bank’s credit card segment did not miss the NPA bus and accounted for 7-8% of its GNPAs. Canara Bank’s total slippages during the previous quarter jumped to Rs 11.1 billion, up by 24.7% QoQ, and making up for 3.6% of its total loans. As for Bandhan Bank, its gross NPA for Q2FY25 inched up on a QoQ basis, up from 4.23% in Q1, to 4.68% in the second quarter. IDFC Bank’s heavy provisioning for its NPAs marred its profits significantly, causing its PAT (profit after tax) to dip by 73% on a YoY basis. Data from ICRA Analytics suggest that the AUM (asset under management) growth in microfinance loans and unsecured (personal and business) loans by the NBFCs will moderate to 10-12% and 19-21%, respectively, in FY2025 compared to 30% and 38%, in FY2024. Says A M Karthik, Senior Vice President &amp; Co-Group Head, Financial Sector Ratings, ICRA, “As bank funds constitute a larger share in the overall funding of NBFCs, a slower credit flow from banks to the NBFCs will compress their AUM growth. The NBFCs in unsecured and digital lending businesses shall face a higher squeeze in funding compared to others, and the unsecured lending space will continue to be a source of stress in the near term.” There has been uninhibited growth in <keyword id="6051027" type="General" weightage="20" keywordseo="Unsecured-loan" source="Orion">unsecured loan</keyword>s, apart from just the microfinance segment. For instance, Axis Bank’s gross slippages jumped by Rs 4,443 crore, largely thanks to its unsecured business. The same is the case with Yes Bank, which saw 35–40% of its retail slippages emerging from the unsecured loan portfolio. <keyword id="6376194" type="General" weightage="20" keywordseo="kotak-mahindra" source="Orion">Kotak Mahindra</keyword> Bank was also quick to follow Yes Bank’s suit, with around 35%-40% of its slippages coming from credit cards. <h2>How is the road ahead?</h2>While RBI has just cracked its whip and served a warning at the moment, experts at Morgan Stanley believe that more changes (read regulatory lashes) are underway. Moreover, with both festive and wedding seasons underway in our country, unsecured lending might pick up momentum, much to the disdain of the calibrated approach banks have been taking towards it so far. But if the situation doesn't improve, RBI will not waste any time in becoming the typical tyrannical <keyword id="19897820" type="General" weightage="20" keywordseo="bollywood" source="keywords">Bollywood</keyword> headmaster who runs his dominion with an iron fist. However, that's a story for another day. Do you have a topic in mind you'd want a simpler explanation for, or insights or personal experience to share on personal finance and more? Contact us at businessinsider@timesinternet.in.

Simply Put: Is the lending party over? The dangerous tango of Indian banks with microfinance and unsecured loans

<ul><li><keyword id="1402053" type="General" weightage="20" keywordseo="ashok-vaswani" source="Orion">Ashok Vaswani</keyword> is a Stanford graduate who is also a CA, CS and did his Bachelors at Sydenham College of Commerce.</li><li>Vaswani worked with <keyword id="44473" type="General" weightage="20" keywordseo="citigroup" source="Orion">Citigroup</keyword> and more recently, at <keyword id="6386585" type="General" weightage="20" keywordseo="barclays" source="Orion">Barclays</keyword>, where he built and grew the business to a scale.</li><li>Vaswani is obsessed with technology but also focused on earning the trust of his consumers.</li><li><keyword id="45051" type="General" weightage="20" keywordseo="uday-kotak" source="Orion">Uday Kotak</keyword> has roped in an outsider given the extent of the transformation that <keyword id="46013" type="General" weightage="20" keywordseo="kotak-mahindra-bank" source="Orion">Kotak Mahindra Bank</keyword> will need in times to come when banks will have to fight for wallet share of consumers. </li></ul>Today, you don’t need to step into a bank to make payments, check your balance or even request for a cheque book. That is if you still use those booklets. Since your bank’s mobile app allows you to do all this and much more online, can there be more digitisation in banking? Well, the new CEO of Kotak Mahindra Bank Ashok Vaswani thinks that a lot more technology can be deployed in banks. As the CEO of Barclays Bank UK, Vaswani knows how the lives of consumers can transform with digitisation. He is also cognisant of the fact that a bank does not only cater to millennials or GenZ population. At Barclays, he had a team of tech experts to help consumers who were even in their 1990s such that they could learn not just digital banking but even chat with grandkids on Skype or Zoom. That is how the new CEO of Kotak Mahindra Bank thinks, given that his head and heart are in the right place. At a time when banks are struggling to keep consumers happy while maintaining high profit margins, Vaswani could well be the man who can plug the gaps. And, if there’s something he can talk about for hours, it is the technological transformation of financial services. Not only is he cognisant of the ease that digital banking brings, but also the risk that comes along with it. This generational shift at India’s fourth largest private bank in India clearly wants to up its game in the years to come by leveraging technology to transform not only its operations but also create new and better services for its customers. Imagine an AI Bot that actually tells consumers every month on how spending on eating out is much more than feasible or that average monthly savings are not good enough when you retire. Yes, Vaswani believes that is the next stage of banking as it can open up different ecosystems. In an interview a few years ago at the University of West England, Bristol, he said: “I would submit that a lot more digitisation can happen. Why would I not be able to tell you, you are earning so much, you are spending this much and you should be saving. Can you imagine, you spent so much money on Uber and that you should be careful?” There are so many aspects of digital transformation that limits are frankly only set in the mind. As the CEO of Barclays UK, he has not just built a lot of products for consumers but even their confidence in the bank and the banking system. It is a refreshing change to hear a CEO talk about confidence in the company and not just on margins. Vaswani has a proven track record spanning three and a half decades across the world’s leading banks. He was initially at Citigroup and more recently, at Barclays, where he built and grew the business to a scale. He brings with him significant executional experience with a high degree of compliance and industrial strength across corporate and consumer businesses. Vaswani was Chief Executive Officer of Barclays Bank, UK and subsequently CEO of their global consumer, private, corporate and payments businesses and Member of the group executive committee. Earlier, he was CEO Citigroup Asia Pacific and Member of the Citigroup Global Operating Management Committees. He also built and ran various country and regional businesses across geographies. What makes him interesting is that he has not only run global banks but has even been president of Pagaya Technologies, a US-Israeli AI fintech company. This kind of exposure makes him a much better candidate than any insider at Kotak Mahindra Bank. At last count, there were three top contenders for the job, but Uday Kotak has roped in an outsider given the extent of the transformation that the bank will need to undertake to remain relevant in the face of competition from other fintechs. Ashok is married to Veena and their daughter is working in the United States of America. It is interesting that Uday Kotak, first generation founder and promoter of Kotak Mahindra Bank, has brought in an outsider to run the bank. Organisations typically are wary of bringing in outsiders at top jobs mostly because of the friction that results from such hiring due to cultural fitment and acceptance of a known candidate. It is easier for the rank and file to accept an insider rather than an outsider but Uday Kotak has chosen to take the risky route. While in some unfortunate cases like Infosys, where Vishal Sikka did not fare too well when promoters stepped away in 2014, the experiment of outsiders has been rather successful at the Tata Group. When Ratan Tata took over the reins at the Tata Group, he brought in Kishor Chaukar who came from ICICI Securities to head Tata Industries. Ravi Kant came in from Philips India in 1999, and headed commercial vehicles for Tata Motors before becoming MD in 2005. In 1998, the then vice-chairman of Hindustan Lever (now known as Hindustan Unilever), moved to Tata Sons as executive director. Typically, Indian corporations bring in overseas talent when they believe that the requisite skills are not available in India. But given that India’s private banking sector has grown and flourished under the stewardship of homegrown talent, this shift is an interesting move by Uday Kotak, who clearly sees merit in Vaswani’s experience outside of India. No wonder Uday Kotak, Founder and Director, Kotak Mahindra Bank said: “I am proud that we bring a ‘Global Indian’ home to build Kotak and India of tomorrow.” Interestingly, Ashok Vaswani is a Bachelor of Commerce, Economics and Accountancy, from the Sydenham College of Commerce and Economics (Bombay University), CA from the Institute of Chartered Accountants of India, CS from the Institute of Company Secretaries of India and Executive Education from the Stanford University Graduate School of Business. Uday Kotak too is alumnus of Sydenham College and has a postgraduate degree in management studies in 1982 from Jamnalal Bajaj Institute of Management Studies.

The CEO who believes that there’s a lot more to digitise at banks

The rising demand for credit in last couple of days has prompted banks to garner funds aggressively through certificates of deposits (CD), bonds, and fixed deposits (FD). The need for aggressive fund raising arose after the surplus liquidity in the banking system dropped sharply from the record high. According to the data compiled by Prime database, banks have so far raised around Rs 42,000 crore through CDs. This was even after the rates on this instruments are rising sharply. The data also showed that Indian Bank, topped the fund raising list via CDs, raising worth Rs 13,550 crore, which was followed by <keyword id="6357149" type="General" weightage="80" keywordseo="hdfc-bank" source="Orion">HDFC Bank</keyword> raising Rs 6,550 crore and <keyword id="62034" type="General" weightage="80" keywordseo="punjab-national-bank" source="Orion">Punjab National Bank</keyword> raising Rs 2,875 crore so far in August. Apart from this, there are various banks such as <keyword id="6354731" type="General" weightage="80" keywordseo="state-bank-of-india" source="Orion">State Bank of India</keyword> (SBI), Indian Overseas Bank, Indian Bank, Punjab National Bank, <keyword id="46013" type="General" weightage="80" keywordseo="kotak-mahindra-bank" source="Orion">Kotak Mahindra Bank</keyword>, ICICI Bank, among others have increased their FD raised 5-20 basis points across maturities to attract more investors. "As liquidity is draining out in a calibrated manner from the system, banks are compelled to raise funds through CDs and even through fixed deposits. Some banks are offering special rates for higher FD amounts. With growth picking up, we can expect banks to aggressively raise funds from the market," said <keyword id="14789739" type="General" weightage="80" keywordseo="venkatakrishnan-srinivasan" source="Orion">Venkatakrishnan Srinivasan</keyword>, founder and managing partner at <keyword id="14790820" type="General" weightage="80" keywordseo="rockfort-fincorp" source="Orion">Rockfort Fincorp</keyword>, a Mumbai-based debt advisory firm. Banks credit growth has remained in double digits handily outpacing the deposit growth. The credit growth has increased in couple of weeks due to low base effect, small ticket size loans, higher working capital requirements due to elevated inflation and a shift to bank borrowings on account of high yields in the capital market. The bank credit has grown over 14 per cent on-year, as per data on the <keyword id="6354335" type="General" weightage="80" keywordseo="reserve-bank-of-india" source="Orion">Reserve Bank of India</keyword> showed. Meanwhile, liquidity in the banking system has cropped sharply in last couple of months. Currently, it around Rs 45,000 crore, as compared to Rs 1.30 lakh crore last week. The sharp drop has been witnessed due to payments for government bonds and outflows on account of goods and service tax payments. Going forward, market participants expect banks to raise more funds because credit demand is likely to rise amid festive season. While, rates on the instruments will also rise due to narrowing of surplus liquidity. "This pace may continue with back of credit off take and <keyword id="30067" type="General" weightage="80" keywordseo="rbi" source="Orion">RBI</keyword> attempts to normalise liquidity, banks need to meet the demand and get the cheaper sources of funds be available so raising via CD and capital instruments to meet the credit demand and preparing oneself for this ahead of festivals and busy seasons," said <keyword id="261562" type="General" weightage="80" keywordseo="ajay-manglunia" source="Orion">Ajay Manglunia</keyword>, MD and Head Institutional Fixed Income at JM Financial. SEE ALSO : <a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/business/news/what-should-investors-ask-mukesh-ambani-at-his-companys-agm/articleshow/93727113.cms">What should investors ask Mukesh Ambani at his company’s AGM?</a> <a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/tech/apps/news/instagram-is-reportedly-testing-a-new-feature-that-looks-like-an-imitation-of-fast-growing-app-bereal/articleshow/93727321.cms">Instagram is reportedly testing a new feature that looks like an imitation of fast-growing app BeReal</a>

Banks aggressively garnering funds via CDs, FDs amid firm credit off take

After several companies and brands abused <keyword id="6355629" type="General" weightage="80" keywordseo="google" source="Orion">Google</keyword> Messages' <keyword id="6389670" type="General" weightage="100" keywordseo="rcs" source="Orion">RCS</keyword> (Rich Communication Services) feature in <keyword id="3658" type="General" weightage="80" keywordseo="india" source="Orion">India</keyword> to bombard users with multiple ads without their consent, the tech company has decided to turn off RCS ads functionality in the country. According to The Verge, Google has confirmed to disabled the feature in India. "We are aware that some businesses are abusing our anti-spam policies to send promotional messages to users in India. We are disabling this feature in India while we work with the industry to improve the experience for users," a company spokesperson said in a statement late on Wednesday. Last month, multiple users took to social media platforms that RCS ads in Google Messages appear to be coming from "Verified Business" accounts and the frequency of such ads has picked up over the last few months in the country. The users reported a deluge of ads, primarily related to personal loans, gambling companies and life insurance. Multiple reports said that the problem has been around for about a year, and "complaints appear to be coming overwhelmingly from users based in India". "The trend initially blew up with <keyword id="46013" type="General" weightage="50" keywordseo="kotak-mahindra-bank" source="Orion">Kotak Mahindra Bank</keyword>, <keyword id="85462" type="General" weightage="50" keywordseo="bajaj-finserv" source="Orion">Bajaj Finserv</keyword>, Buddy Loan, and PolicyBazaar have turned out to be the biggest offenders," the reports claimed. While several brands globally use messaging apps and SMS texts to advertise new products, these ads going on in India "are not necessarily the result of a user's buying activity," the reports noted. The RCS upgrades SMS with branding, rich media, interactivity and analytics. With RCS, businesses can bring branded, interactive mobile experiences, right to the default messaging app. According to Google, millions of businesses rely on SMS to communicate with mobile consumers. RCS Business Messaging upgrades SMS with branding, rich media, interactivity, and analytics. With RCS, businesses can bring branded, interactive mobile experiences, right to the native <keyword id="6355645" type="General" weightage="50" keywordseo="android" source="Orion">Android</keyword> messaging app.

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Simply Put: Is the lending party over? The dangerous tango of Indian banks with microfinance and unsecured loans

Ira Alok Puranik

The CEO who believes that there’s a lot more to digitise at banks

Malini Bhupta

Banks aggressively garnering funds via CDs, FDs amid firm credit off take

IANS

Google disables RCS ads functionality in India after brands abuse the feature against users consent

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