Hello everyone,

Welcome to the 73rd edition of The Pattern, a weekly newsletter where we bring you the latest from the worlds of finance, economy, and technology. Let’s dive right in!

In the week that absorbed India’s 77th Independence Day, the Reserve Bank of India (RBI) took corrective measures that can only be described to be in the interest of the people. It rolled out notifications promoting borrower and depositor welfare - a decisive affirmation of its commitment to regulate the space in a manner that prioritises the beneficiaries of India’s banking system, its citizens. 

Forgotten deposits to find their way home

 The total amount of forgotten deposits in Public Sector Banks in India stood at Rs 35,012 crore as of February 2023. This number reflects a 133% rise in unclaimed deposits since December 2019. 

But what are unclaimed deposits exactly?

Banks label deposits as unclaimed if the accounts holding them haven’t been operational for more than 10 years. The funds in these accounts are then transferred to the RBI’s Depositor Education and Awareness Fund. 

Returning these funds to beneficiaries or their dependents has always been on the radar for the RBI. In its 2014 Master Circular on Customer Service in Banks, the regulator expressed concern that banks were enjoying these deposits without having to pay interest on them. It urged banks to identify holders of these unclaimed deposit accounts more proactively.

This week, in addition to its  detailed instructions  on the treatment of inoperative accounts, the RBI this week rolled out the UDGAM portal that is meant to allow customers to easily locate unclaimed deposits from across a number of banks. Currently, six banks have been onboarded on the portal and more will be added soon. This will ensure that the right account holders identify not only their deposits, but the interest due to them through user friendly portal. It would help them minimise tedious processes like physical bank visits.

Lenders can no longer charge punitive ‘interest’

 Apart from its initiative in favour of depositors, the RBI also announced something for borrowers. In a notification released today, the top bank took a critical step towards inculcating fair lending practices among lenders. It clarified its stance around penal charges levied on loan accounts. 

It has ruled out the application of penal charges in the form of interest over and above the existing interest rates. Such a practice undercuts the purpose of the extant guidelines that give banks the autonomy to formulate board-approved policies on penal interest rates – which is to encourage a sense of financial discipline and hygiene. Instead, the regulator observed that it was being used as an additional tool of revenue enhancement.

Here’s how the RBI intends to address these concerns:

1. Penalty should be charged as ‘penal charges’ and not ‘penal interest' added to the original interest charged. No further interest should be computed on the penal charges as well.

2. Lenders shall not introduce any additional component to the interest rate.

3. Lenders should create a board-approved policy on penal charges.

4. The charges should be commensurate with the non-compliance of the terms and conditions of the loan contract, and not be discriminatory.

5. The quantum of the penal charges should be clearly disclosed to customers in the loan agreement and its terms and conditions, as well as displayed on the lenders’ website under interest rate and service charges.

6. The penal charges in case of loans sanctioned to ‘individual borrowers, for purposes other than business’, shall not be higher than the penal charges applicable to non-individual borrowers for similar non-compliance.

7. The applicable penal charges shall be communicated each time reminders around non-compliance are sent.

These instructions will come into effect from January 1, 2024. Lenders have been authorised to revise their policy frameworks in the meantime. For existing loans, the new penal charges should be ensured during the next review, renewal date, or six months from the effective date of the RBI’s circular, whichever is earlier.

In other news…OCEN gets a facelift

The Indian Software Products Industry Round Table (ISPIRIT) unveiled OCEN 4.0, the latest version of the Open Credit Enablement Network. This will include updated API specifications, a registry, and a product network. The new version is all set to ease credit access for MSMEs through cash flow-based, short-tenor and small-ticket lending.

The network, which is already disbursing loans amounting up to Rs 8 lakhs through its pilots, will now be able to address the credit needs of small entrepreneurs. ISPIRIT estimates that these loans - required for maintaining inventory, equipment purchase, or business expansion - could be in the Rs 5,000 to Rs 1,00,000 range. The OCEN framework aims to close the credit gap in the MSME sector by allowing lenders to operate in remote areas and enabling consented access to alternate data.

That's all from me this week. As always, leaving some interesting data and reading recommendations below. 

Reading list  

1. Improving the ease of exit for businesses

2. Quality customers, brilliant experience: How Airtel’s strategic focus helped it make a strong comeback

3. Can ONDC succeed in financial inclusion when the rest faltered?

4. The death of a defaulter

5. Beware the three bears now that Goldilocks has exited

Between the digits

67%: The drop in funding to Indian FinTech startups. However, despite this, funds raised in the first six months of 2023 only dipped by 6% from the $1.5 billion raised in H2 2022.

1,200: The number of startups in tier 2 and tier 3 cities to receive funding under an expansion of the Digital India scheme.

178%: The jump in profit seen by the State Bank of India in Q1 of the present financial year.

Rs 30,000 crore: The amount of unclaimed deposits lying in India’s banks.

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter  here  and follow  FinBox on LinkedIn  to never miss any updates.  

Cheers, 

Mayank

  All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.