consumer Finance

Class - BBA ll nd yr.

Subject - Financial Market & Services

Subject type - Minor ll

By AP N Jaiswal

As per the Reserve Bank of India (RBI),

Consumer Credit refers to loans to individuals for consumption purposes, including loans for durables, credit cards, auto loans, and personal loans for specific needs (like gold or property security, or for professionals, excluding business use), but it specifically excludes loans for education, housing, investment in financial assets, or KCC loans to farmers, often clarified in regulatory circulars concerning risk weights

Key Aspects of Consumer Finance Regulation by the RBI

• Consumer Protection: The RBI established a "Charter of Customer Rights" that enshrines five basic rights: the right to fair treatment, transparency, fair and honest dealing, suitability, privacy, and grievance redressal and compensation.
• Fair Practices and Transparency: Regulated entities (REs), including banks and Non-Banking Financial Companies (NBFCs), must have a Board-approved Fair Practices Code. Key guidelines include:
  • Transparent Communication: Clearly communicating all terms and conditions, interest rates (Annualized Percentage Rates or APR), and charges to the borrower in writing and in a language they understand.
  • No Hidden Charges: Prohibiting the levy of any charges not explicitly indicated to the customer at the time of agreement.
  • Prospective Changes: Ensuring any changes in terms, conditions, or interest rates are applied only prospectively, with due notice given to the customer.
  • Proper Assessment: Lenders should properly assess credit applications based on the borrower's creditworthiness, rather than solely relying on security stipulations.
• Responsible Lending and Recovery: The RBI mandates responsible borrowing and lending practices to prevent over-indebtedness and unethical behavior:
  • Responsible Recovery: Lenders and their agents are prohibited from resorting to undue harassment, intimidation, or use of "muscle power" for recovery of loans.
  • Ethical Agent Conduct: Financial institutions are fully responsible for the actions of their Direct Sales Agents (DSAs) and recovery agents and must ensure they adhere to a code of conduct.
  • No Unsolicited Cards/Loans: Issuing unsolicited credit cards or providing unsolicited credit limit enhancements is strictly prohibited without the customer's explicit consent.