Lender’s Dilemma: Maintain Poetic Leniency Or Plan Monetary Prudence

The recent case of suicide of the lead promoter of a Bollywood Art design studio near Mumbai has opened a volley of questions on the ethics of lending as a business. At first glance, the reports around the suicide leave a bad impression of the lender to the general audience. This image seems no different than what Shakespeare left with the character of Shylock, a lender who demanded a pound of flesh from his borrower.

The public perception of lending as a business is no different from the recent case or from what Cinema shows at the reel. At one end movies such as EMI explained the strife of customers, while shows such as Money Heist normalized acts of bank robbery. In the real world, 25,000 suicide cases in India were linked to debts (in the three years to 2020) therefore implying the need for a shift in public perception towards lending.

Thanks to the digital flourish, it is far easier to start or discontinue a loan today than ever before. However, this ease of digital banking has not percolated into a desired level of confidence among the general public. To a section of society, an inability to pay automatically translates into an adverse action – going incommunicado or worse, suicide. Such cases illustrate how closely linked mental and financial health are. And, instead of blaming banks squarely for adverse actions of borrowers, there is a need to educate borrowers about fair lending – acceptable lending and recovery processes.

Users of banking and financial services expect them to be lenient. This leniency has often resulted in unexpected demands - write-off loans, rationalize the interest component, and even waive-off GST fees on certain credit card dues. The regulatory framework, however, doesn’t expect banks and FIs to be lenient. Rather, it expects them to be rational, transparent, responsible, ethically-sound and follow the banking system set by the Reserve Bank.

Both banks and financial administrators such as the Reserve Bank have strived towards fair lending practices which are also crucial to the economy as they foster financial stability and sustainable growth. Responsible lending ensures loans are extended to creditworthy borrowers, reducing the risk of defaults and financial crises. This channels capital to productive investments, supporting entrepreneurship and job creation. Ethical lending prevents predatory practices and protects consumers, enhancing trust in financial institutions. Moreover, it maintains the integrity of the financial system, preventing speculative bubbles and market distortions. Overall, good lending practices is the cornerstone of economic health, promoting responsible capital allocation and ensuring the long-term well-being of both borrowers and lenders.

Over the last few years, the Indian administration and banking regulator has done considerable work in enhancing the revival and recovery process. Besides the adoption of the Insolvency and Bankruptcy law, there has been a streamlining of a legal framework for loan recovery, as well as expediting resolution processes and reducing delays. The Reserve Bank has also encouraged adoption of technology and data analytics to assess borrower creditworthiness and monitor repayment behavior effectively. Several banks have AI/ML (Artificial learning and Machine Learning) tools to detect the credit worthiness of a borrower and in due course there maybe real-time information collated from social media to effectively present a true picture of the borrower.

The availability of Asset reconstruction companies (ARCs) has enabled the availability of a secondary market for distressed assets, helping banks offload non-performing loans. Such mechanisms have enabled recovery and recollection processes. The regulator has also been pragmatic in enforcing guidelines and campaigns around responsible borrowing and financial literacy. Lenders and regulators may have ticked all the boxes to a fair lending business. But, without customer focused education campaigns, this equation may still remain unbalanced. The worst fear with bankruptcy is not the loss of an enterprise but the societal shame that one goes through. As a society we therefore need to ask ourselves on ways to normalize failure to individuals rather than pass our perception as judgement upon an industry. Banking as an industry has gone through a sea-change since 1596. This time perhaps what needs to change is not the industry but the public perception of it.

Authors: Akshat Khetan, Founder of AU Corporate and Legal Advisory Limited (AUCL). Views are personal.