Hello everyone, 

Welcome to the 81st edition of The Pattern, a weekly where we dissect the latest rumblings from the world of banking, finance, economy, and technology. Let’s get started.

Tough days at the office

When things appear to settle down, a storm tumbles the landscape and pulls the rug from under us. That’s how most banks and NBFCs’ leaders must be feeling these past two weeks. The financial services industry isn’t easy to survive, but the recent onslaught of bad news has likely impacted not just operations and strategy but, most importantly…morale! Let’s figure out what is happening. 

First, there’s the regulator. After a hiatus to levy penalties and fines on errant lenders, the Reserve Bank of India has sprung into action once again as it spotted specific over-the-line actions. 

On Tuesday, the RBI told Bank of Baroda to stop onboarding new customers on its mobile application ‘bob World’ with immediate effect. This came in the light of reports that specific agents on the ground were putting in their phone numbers into customer onboarding applications and, thus, allegedly, using that to access and siphon funds. 

One report suggested that as many as 4.2 lakh accounts belonging to more than 7,000 branches were affected. The bank also audited its operations on the regulator's behest and found that more than Rs 22 lakh have been stolen from 362 customers. 

This has been one of the more significant actions in recent times on a large public sector bank for lax onboarding practices that have led to material harm to the entity’s customers. 

This was followed by a monetary penalty of Rs 5.39 crore levied on Paytm Payments Bank for negligences on various counts, including KYC and onboarding, cybersecurity, risk management, and screening. The payments bank did respond to the RBI’s notice, and after considering the banks’ defence, the central bank found it in the wrong and imposed the penalty. 

These are just two instances but point to a larger malaise in the industry. Banks and NBFCs are equally worried about their products and practices attracting regulatory action and penalties, and the scramble to get the houses in order is now catching pace. 

At the same time, the regulators have consistently emphasized the importance of governance, controls, risk management, and audits for all financial services industry players in their public appearances. As we’ve seen earlier, the regulator doesn’t shy away from taking prudent action when its caution isn’t taken seriously. 

The insecurities of unsecured lending 

Another thing that the central bank has been sermonizing about is the growth in unsecured books of both public, private, and non-bank lenders across the board. The regulator has seen the trends, it has scrutinized the data, and its monitoring of the economy have all yielded a worrying conclusion - this unprecedented growth in retail unsecured credit could be a ticking timebomb. 

According to the central bank’s data, credit card outstanding increased to Rs 2.18 lakh crore in August, as compared to Rs 1.68 lakh crore a year earlier. This is coupled with an almost 26% increase in outstanding personal loans during the same period. 

While the RBI has been warning about this for a while, now a new research note from UBS, a multinational investment bank, has suggested that many of these loans are being given to people with ‘weaker risk profiles’, which could be a cause for concern in terms of portfolio health and quality. 

"The share of loans to borrowers with weaker risk profiles has risen along with an increase in retail borrowers' leverage," UBS said in a note, according to the Economic Times. 

Just last week, RBI Governor Shaktikanta Das had warned about the same during the monetary policy briefing. 

“Certain components of personal loans are, however, recording very high growth. These are being closely monitored by the Reserve Bank for any signs of incipient stress,” Das had said . 

His words were then echoed by J. Swaminathan, deputy governor of RBI.

“It’s our intention to inform banks this is an outlier level of growth," Swaminathan said. “This is a general system level advisory so that banks and NBFCs tighten their internal prudential measures and grow their portfolio sensibly."

While it’s nearly impossible to expect personal unsecured loans to reduce by a whole lot just basis these warnings, financial services players must align strategy, operations and incentives so that the water doesn’t go over their head…or starts to boil.

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

Between the digits 

Rs 103 crore: The networth of NE Small Finance Bank that’s likely to be acquired by the fintech Slice. RBI prescribes a minimum networth of Rs 200 crore for small finance banks.

9.3%: According to UBS, the number of borrowers with multiple retail loans outstanding has increased to 9.3% in FY23 from 3.9% in FY18. 

Reading list 

1. India’s banks are making $64 billion from a freebie

2. RBI ban on onboarding customers via app can affect growth trajectory of Bank of Baroda: Report

3. Small finance banks wish to shed "small" tag, wait for RBI signal to seek universal license

4. Introducing FinBox BureauConnect - an intelligent, multi-bureau strategy platform 

5. AI in Lending: Unleashing the power of data by Rajat Deshpande 

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.