Loan disbursements took a hit due to the IL&FS crisis, but borrowers rejoice as loan rates get transparent in 2018.
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 company 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.”
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