From a lender’s point of view, responsible lending is to act in a customer’s best interests, ensuring affordability, transparency of terms and conditions and supporting a borrower if they experience repayment difficulties. Lenders have a responsibility to make sure borrowers understand the details of a loan and carry out thorough checks on any borrower, so they can be confident that what customers will receive will be suitable for their circumstances.
Bankers and lenders can make lending fun and interesting through hyper-local events (such as a loan mela at a small town and semi-urban areas during the upcoming festival season), which offer a distinct opportunity to sensitise banking solutions with creative campaigns and positioning.
For instance, whenever a non-banking finance company (NBFC) is launching a limited-period loan offer, special rate or simply trying to promote a solution, it should use applicable events and relevant local and regional media to increase awareness, generate interest and drive results.
By providing the ability to share valuable information with the community, local events offer the means to demonstrate that lenders understands consumer needs.
In these events lenders should share relevant content in the form of personal finance tips, investment advice and more. Such insight will also illustrate the supportive nature creditors, increasing consumer confidence and create a credible image lenders are dedicated to consumers’ financial well-being It should be a normal practice for a lender to tell an existing or a new customer: “Let us show you how to manage your incoming and outgoing finances,” or “It is very important to know the difference between your needs and your wants.” This will help you in setting your priorities so that you know where to spend your money.
Giving advice to potential and existing customers about savings and how to manage borrowing should be a normal standard operating practice (SoP) embedded into a responsible lender’s mandatory to-do check list.
It is absolutely critical for lenders to convey to a client that saving lets avoid the interest one has to pay to borrow money. Most people know the reasons to save—but many don’t do it consistently. It is for the lender to tell the borrower how to save.
It is important for lenders to hold financial literacy and personal finance outreach programmes with institutions such as The National Centre for Financial Education (NCFE), comprising representatives from all financial sector regulators, ie, Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), Pension Fund Regulatory and Development Authority (PFRDA) and National Institute of Securities Markets (NISM).
Any responsible lender must advise the client on savings and spending. Cut unnecessary expenses and put your savings into a separate account. Spend for things you need, but wisely. It’s usually best to clear up any high-interest debts before starting your savings, because they usually cost more than you can earn with a savings plan. Pay these debts first and then regularly put the money into a savings account. Pay yourself first. Set aside money from your income before you spend on anything else. Make use of tax benefit schemes to maximise your savings. Schemes like, EPF, PPF, NSC, ELSS, SSY,NPS etc are a good way to reduce the taxes you pay on your savings.
In India, taking into consideration the specific business nature of non-banking finance companies (NBFCs), they are subject to specific guidelines of the Reserve Bank of India (RBI) on Fair Practice Code (FPC).
NBFCs are required to adhere to all elements of the FPC that RBI had issued in July 2015. It is also important greater resources are devoted to professional inputs assessing credit-worthiness. According to the RBI’s FPC, lenders are expected to be prudent and responsible in their lending activity besides educating their borrowers on the dangers of wasteful conspicuous consumption.
Responsible lending is about being sensitive to people’s need and emotions. McKinsey & Company found that the main reason people switched banks was based on emotions. There can be no better example of responsible lending that giving out advice, pro bono, to clients on how to establish an effective savings strategy.
-By Devashish Das Gupta, professor, marketing, IIM Lucknow