Just another financial conversation !

Off late, I have been intrigued by the increase in financial / lending activity and usually end-up having very interesting conversations with different customer segments. Below are a couple of recent fascinating ones (these might seem to be silo-ed instances, however, my takeaways have been consistent). Disclaimer is “I am not the expert”, and assumption is “facts were presented during these dialogues” (I learn from experiences / conversations). I do not intend to name any organization for sheer fact that these behemoths exist because people still trust them and their operations

Conversation 1

I was generally discussing with a cab driver about trends of muted income from cab aggregators and how the pandemic effected his livelihood. It led to an invigorating understanding of his P&L and cashflows (I did my mental excel modelling). Closer to my destination, next drive request popped up on his mobile, which he rejected. He seemed rational enough to not take additional “business”, so I enquired on the reason to reject the ride

Driver in elated mode - “After dropping you I would rush back home to receive my credit card”

Me in a curious mode – “Do you seriously need a credit card, given you are already paying for a car and mobile loan EMI. Moreover, you still are struggling to be positive month-end cashflow “

Driver in a reassuring mode – “Sir, I need to renew my car insurance & commercial registration and get the quarterly car maintenance, for which I don’t have enough money. My loan applications have been rejected by multiple banks. Bank ABC (a private sector bank) has issued a “no-fee” credit card instead and I will avail the cash withdrawal facility on card”

Conversation 2

I have convinced my house help and driver to get included into the formal banking system. During the pandemic, my driver decided not to transact on his bank account (with bank XYZ, a public sector bank) and the same went into dormancy. Recently, I asked him to reactivate the account to deposit his salary (he deposited a token sum of INR 2000 at the time of activation)

Interestingly from the day of deposit, INR 295 got deducted everyday for 5 days, post which he decided to withdraw the remaining INR 500 and asked the payment in cash. On raising a complaint with the branch, he was informed that he had taken a loan couple of years back which he has not repaid.

My driver confirmed that he had taken two loans (for buying a mobile phone and TV) which he had repaid pre-pandemic. The EMI for each loan was INR 1200 and INR 1800 respectively

My takeaways:

• A responsible banker would not have recommended a credit card to somebody who is struggling to meet ends. Financial inclusion is important, but financial education should precede inclusion.

Such mis-selling not only impacts the customer but also the financials of the bank. An already debt laden borrower, will take another debt on the credit card (at a much higher interest rate) and eventually turn NPA (with multiple banks). Each bank will in-turn spend time /money / effort in the recovery process and have an impacted B/S and P&L with write-offs / high provisions etc.

• INR 295 deducted from an account might not be due to previous loans, but for non-maintenance of minimum balance. The banker who helped with the reactivation should have mentioned about minimum balance requirements. If in the remotest of possibilities, it turns out to be a loan repayment – it could be a case of identity theft

The bank in question has already lost a customer. May be the individual might move out of the banking system and revert to cash economy

The basic assumption of above incidents is that the on-ground sales force has enough knowledge of the financial products and full disclosure to end customers isn’t happening. We have all heard and learnt about new modes of lending with high-tech behavioral assessments for credit scoring, leading to new-age banks focusing on small ticket size loans (INR 1000 – INR 50000). BNPL and POS lending are specifically targeted to these segments and most tech savvy lenders are focusing on quicker turn arounds to satisfy the “instant gratification” need of customers. Even zero balance accounts are being offered with technological innovations on expenditure management, transaction analysis and what not. However, a few basic problems are still unaddressed:

• Segment in question lacks financial understanding and it’s a steep learning curve for them. Many don’t even have the basic reading / writing skills let alone operating a banking app
• Unlike other segments, the impact of a small monetary loss can have massive emotional and financial impact. INR 300 – INR 1000 would be the maximum savings at the end of each month and losing this amount would be a cause of distress
• Segment is overwhelmed with the availability of liquidity and does not understand the future implications of taking credit. This could lead to heavy inclination to borrow more without the actual repayment capability
• Segment is extremely vulnerable to third party frauds (e.g., identity theft). Well, my driver had submitted his Aadhaar Card, PAN card, Cheque etc. with a small unknown car rental company, which is good enough information to get credit

At this point, it is important to curb fraudulent practices and give an easier perspective of risk / reward to the segment. Some suggestions:

Scenario builder (esp. worst scenarios) integrated with every lending product

For a credit card, customer should be made aware of how much interest s/he would pay if an INR 1000 credit balance is unpaid

Lender should get the basic details of customer’s cash inflow and build a monthly inflow-outflow statement to show how +ive or how -ive the customer will be with EMIs / payments

Any deductions (even the smallest amount) from accounts in these segments should be first intimated to the customer

Customer care should intimate the customer even if a small amount is to be deducted from the account of customer for non-maintenance of minimum balance. Instead of making multiple calls to the segment I belong, to sell credit cards / other financial products, in the long run banks will be benefitted more by making calls to the segment in question

Better identity verification mechanism at the point of sale should be implemented.

Visual analytics to compare the picture of the person applying for loan with the Aadhar Card submitted (there are many tech companies which offer such products / services. We should educate the segment on the concept of identity theft and the reason for the added extra layer

My message is not intended to deny credit to the creditworthy or deny people of the good things in life. However, responsible bankers should present all information to prospective customers (in a simple manner esp. to the vulnerable segment), who cannot see the pros/cons themselves. Information asymmetry is hazardous to customers in short term and even more detrimental to businesses in the long run.?