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Identifying the relevant issues relating to consumer lending by banks

What Is The Effect Of Borrower Sharing On Delinquencies.

The current economic crisis has led to the underscoring of the centrality of the consumer credit in the present economies. In this manner the main focus has been on the lenders and the transformations in the practices related to lending among various nations during the second half of the twentieth century. The current work of Sutherland (2015) acts as a key reminder that the American model of credit, which is even known to be very influential for all the continents, which in no manner is static in nature but has gone through several kinds of transformations after the second world war. The research undertaken by Morse (2015) addressed the inequalities that were existent in the credit market of USA. A two tier credit system was addressed within which the increasingly ineffective and expensive retailing credit was prevailed in the urban areas and attempts were made in order to overcome the market that was looked upon to be divided.    

In Europe, the development of instalment credit has been increasingly been dominated during the years after the post war. Melzer and Morgan (2015) explained the significant role of economics and the television sector for the development of the credit policies and the credit systems in various parts of Europe. It is seen that there has been a rise in the extent of the credit worthy and therefore with the advent of time the demand for consumer lending has increased all over the world.

Butler, Cornaggia and Gurun (2016) shifted the focus on the borrowers and their enquiries regarding to the credit access, issues related to privacy and the transformations in the social context towards credit. Hawkins (2016) assesses the long convention of the working class credit as they have been supplied with the access towards credit by the lending and the check trading companies.

There have been drastic changes in the consumer lending attitude in the twentieth century because of the fact that in the current time period, there has been several rules and regulations with respect to the use of money and consumers prefer to lend money in order to purchase any kind of assets that are of higher value. Campbell (2016) explained the fact that the consumers have been keen on taking loans from various lending companies as they are offered lower rates of interest and they do not have to bear the burden of paying the entire amount together. The regulations and the policies that are constructed by the government of different countries have been different and this has led to the differentiation in the consumer lending policies and activities in different countries. However, the aim and the purpose of consumer lending has remained the same and the countries in order to improve the economies of scale have been looking forward to enhance the lending practices. The process of lending has increased the purchasing ability of the consumers and therefore at the current time period, there has been development of the consumer lending activities all over the globe (Chakraborty, Goldstein and MacKinlay 2018). The consumer lending activities in the developing countries have increased as well. The advent of globalisation has led to the rise in the consumer lending companies and the same has been seen in the countries like India.

High Interest Rate Spread

Di Lorenzo (2016) ascertained that consumer lending has increased in India mainly due to the development of new companies in the industry and changes in the tastes and preferences of the consumers. The consumers are looking forward to purchase new and improved products in order to improve their lifestyle. The huge market in India has created several kinds of consumer lending demands and different policies have even created in order to take care of these kinds of lending demands.

The banks as well as the consumers are eligible for certain sort of financial rights that needs to be protected with the help of a desired framework that would be helpful in creating a balance among the both the entities’ rights independently. Adriana and Dhewantoa (2018) explained that consumers in India has been the weaker than the banks and therefore the process of equalising is essential. The vision that is market oriented in nature for the economic managers has given the banks a favourable position than the consumers.

The banking sector has shown a capacity to have an influence on the procedures, policies and the rules in their favour, as it is seen that it effectively equipped with the financial resources, technology and knowledge and thereafter lobbying with the governance tools (Srivatsa 2015). The leverage is leading to the development of an entire range of issues and grievances, especially in association to consumer financing and thereby negatively having an impact on the capability of the consumers to safeguard and articulate their financial rights and gain access if the banks look to violate these rights (Sharma 2018). There are several issues that are related to the consumer lending practices and each one of them have been explained as follows:

The extent of low interest rate spread is a key indicator of the competition and the effectiveness in the financial process and assists in the economic development with the help of the rise in the extent of investment. In the domestic context, the key issue related to consumer lending from the viewpoint of the national economy as well as the individual consumers has been that India has one of the increased interest spread in the global economy (Nguyen and Nghiem 2016). The assessment of the Indian economy has indicated the fact that there has been a fluctuation in the rate of interest and it is seen that with the changes in the government regulations, the rate of interest in relation to consumer lending has been increasing.

Variable Interest Rate

Narang (2017) explained that variations in the rate of interest has a significant impact on the lending attitude of the consumers. With the advent of time, as the lending process has increased in India and even in the globe, it is seen that this rate of interest has had an impact on the lending practices. The changes in the variable interest rate creates a confusion in the minds of the consumers. A variable interest rate goes up and down and it is based on the factors that is inclusive of the transformations in the rate paid over the certificates of the bank like the treasury bills and certificate of deposit (Jose, Khare and Buchanan 2015). From the viewpoint of the consumers, this makes a huge difference whether the banks have been charging a variable or a fixed rate over the credit. In case the consumers come into an agreement with the bank by relying on the fixed rate of interest, it is seen that the bank cannot transform the overall payable interest at the time of the entire time frame of the interest rates increases in the market (Ku?erová and Kapounek 2015). On the other hand, when the rate of interest becomes variable, the bank ties with the rate with the index. The interest that is payable by the consumer becomes variable as the index makes changes.

Rai and Bansal (2015) explained that as the consumer financing portfolio is rising, quality of the associated banking services has been becoming serious problem. The delays related to processing, ineffectiveness of the services, debits that have been unauthorised and the non-compliance with the need of providing the banks statements on a monthly basis have been certain instances of the poor quality of the services from the banks (Banerji et al. 2016).

These issues have been pertinent in the banking sector with the development of the consumer lending practices.

The report would look to highlight the issues related to the consumer lending practices that are existent in ICICI Bank. ICICI Bank is one of the leading private banks that is operational in India and the bank has been providing extensive level of services to their customers. ICICI Bank like all the other banks have been looking forward to provide various kinds of services (Icicibank.com 2018). One of the services that have been provided by ICICI Bank has been consumer lending. However, researches have indicated that there are certain consumer lending issues that have been faced by the banks.

Deteriorating Quality of the Services

ICICI Bank has faced numerous issues and one of them has been that the regulations and the laws that are existent in the country has an impact on the consumer lending services of the bank. The government has constructed laws where it has been stated that the banks and the financial institutions cannot compel the consumers to pay back the lending amount when the consumer has been found to be bankrupt (Icicibank.com 2018).

It is seen that the market for consumer lending has been high as the consumers have been looking forward to take loan in order to meet their expenses and have a healthy lifestyle. This has led to the rise in the extent of competition as there are several banks that are existent in the consumer lending economy in India. The banks in order to create competitive edge have created extensive offers and facilities to the consumers and therefore the market has become very demanding (Kundu 2016). This is one of the issues that have been having an impact on the operational and the consumer lending practices for ICICI Bank.

In the Indian economy, it is seen that the consumer lending practices have been high because of the fact that the economy has been developing and therefore demand for consumer lending is high. The supply for this kind of lending has been high as well as there are various banks and financial companies that are existent in the economy (Icicibank.com 2018). All these companies have been looking to increase their extent of profit and increase their customer base and therefore sufficient supply is existent. However, it is seen that the banks have been maintaining various plans and strategies with the help of which the defaulter for the lending services can be lowered. The banks charge certain fees for the lending services they offer and even incur high interest rates (Anitha 2015). The banks even apply penalty if the consumers are unable to pay the lending they have undertaken and this leads to consumers to pay back the loan on time. The frauds that take place at the time of consumer lending has an impact on ICICI Bank. The issues that have been explained has been the issues that have been faced by ICICI bank for the lending practices they offer.

ICICI Bank has numerous kinds of products that are offered by them. The bank has the aim of having responsible lending and therefore before providing the services, the consumers are made aware that they maintain responsibility to pay back the money taken as loan in order to maintain responsible lending. The banks and the financial institutions construct credit score for the consumers and this is calculated based on the default they have made and the tenure and the penalties paid by them for the lending services (Icicibank.com 2018). ICICI Bank provides credit cards to their consumers. Interest rate has to be paid for the use of the credit card and penalty would be levied if the interest for the money used is not paid. The consumers are asked to pay the principal amount as well as the interest levied over the interest so that no penalties are charged on it. The credit cards even have a limit amount that restricts the consumers to make payments with the help of the card up to a certain extent. The credit limit is based on the financial position of the consumer. There are several of loans that are offered by the bank and it constitutes of home loans, motor vehicle loan, personal loans and education loans (Icicibank.com 2018). These loans assist the consumers to purchase their desired asset and even go undergo further education. The loans are approved after critical assessment of the background of the borrower. The financial background as well as the loan history of the borrower is even taken into consideration. The borrower has to provide a collateral for the loan to the bank in case the borrower is unable to pay back the loan (Icicibank.com 2018). The bank in this case can acquire the collateral and thereby attain the loan amount that has been provided. Therefore, collateral is in accordance to the amount that is taken for loan. ICICI Bank before sanctioning any loan and credit cards to their consumers undertakes a background check and therefore asks their consumers to provide documents regarding their income, address proof and various other documents in order to have an understanding of the authenticity of the consumer (Icicibank.com 2018).

Consumer lending business of ICICI Bank

A comparison would be made with the services offered by ICICI Bank with another bank that is operational in the Indian economy and therefore comparison has been made with HDFC Bank, which is even known to be a renowned private bank that is functional in India. The comparison comes with the conclusion that both these banks are competitors to each other. It is seen that like ICICI Bank, HDFC bank provides various kinds of loans and even offers credit cards to their customers. However, the difference between the two banks have been the interest rates that have been charged on the loan and the interest that is charged on the credit cards. ICICI Banks charges a lower amount of interest over the personal loan and the rate has been 10.99% in relation to HDFC bank where the interest rate has been 11.05% (Icicibank.com 2018). It is even seen that interest rate charged by ICICI Bank is lower than that of HDFC Bank even though it is seen that services that are provided by ICICI Bank are much better than HDFC Bank. ICICI Bank levies an interest rate of 2.49% per month, while HDFC offers an interest rate of 3.5% per month. By taking an overall analysis, it is seen that the interest rate charged by ICICI Bank are lower than that of HDFC Bank and therefore the number of customers for ICICI Bank for the purpose of consumer lending is higher than that of HDFC Bank (Icicibank.com 2018). Hence, it can be said that ICICI Bank performs better in accordance to other banks especially HDFC Bank.

Conclusion

The assessments that have been done for the purpose of consumer lending especially for ICICI Bank that is operational in the Indian economy, one can say that consumer lending market has been high as the demand and the supply in the economy for the purpose of lending is high. The consumers are looking to increase the extent of lending and therefore the banks and the other financial institutions have been making plans and policies in order to enhance their activity level. There are issues pertinent to the consumer lending activities of ICICI Bank and therefore the banks have been taking activities in order to mitigate these issues. The bank has better performance in relation to HDFC Bank and it can be recommended to ICICI Bank that they frequently assess their lenders and the payment options and in case of defaulters take initiatives in order to gain the money that was given out as loan to the consumer.         

Reference List 

Adriana, D. and Dhewantoa, W., 2018. REGULATING P2P LENDING IN INDONESIA: LESSONS LEARNED FROM THE CASE OF CHINA AND INDIA. Journal of Internet Banking and Commerce, 23(1), pp.1-19.

Anitha, V., 2015. AGRIBUSINESS–EMPLOYMENT OPPORTUNITIES FOR WOMEN ENTREPRENEURS IN INDIA. Trends, Challenges & Innovations in Management-Volume II, p.237.

Banerji, A., Birol, E., Karandikar, B. and Rampal, J., 2016. Information, branding, certification, and consumer willingness to pay for high-iron pearl millet: Evidence from experimental auctions in Maharashtra, India. Food Policy, 62, pp.133-141.

Butler, A.W., Cornaggia, J. and Gurun, U.G., 2016. Do Local Capital Market Conditions Affect Consumers’ Borrowing Decisions?. Management Science, 63(12), pp.4175-4187.

Campbell, J.Y., 2016. Restoring rational choice: The challenge of consumer financial regulation. American Economic Review, 106(5), pp.1-30.

Chakraborty, I., Goldstein, I. and MacKinlay, A., 2018. Housing price booms and crowding-out effects in bank lending. The Review of Financial Studies, 31(7), pp.2806-2853.

Di Lorenzo, V., 2016. Evolving Ethical Standards in Property Law: A Study of Regulatory Perspectives Toward Home Mortgage Lending Transactions. In Community, Home, and Identity (pp. 151-176). Routledge.

Hawkins, J., 2016. Using Advertisements to Diagnose Behavioral Market Failure in the Payday Lending Market. Wake Forest L. Rev., 51, p.57.

Icicibank.com. (2018). Personal Banking, Online Banking Services - ICICI Bank. [online] Available at: https://www.icicibank.com/.

Jose, S., Khare, N. and Buchanan, F.R., 2015. Serving the poor: captive market CSR and repurchase intention. International Journal of Bank Marketing, 33(3), pp.316-329.

Ku?erová, Z. and Kapounek, S., 2015, September. Determinants of Bank Lending Activities in the European Union Countries: Is There Any Difference Between Bank-based and Market-based Systems. In 13th International Scientific Conference “Economic Policy in the European Union Member Countries (pp. 2-4).

Kundu, D., 2016. Microfinance delivery institutions in India-governance and management challenges. Journal of Commerce and Management Thought, 7(2), p.278.

Melzer, B.T. and Morgan, D.P., 2015. Competition in a consumer loan market: Payday loans and overdraft credit. Journal of Financial Intermediation, 24(1), pp.25-44.

Morse, A., 2015. Peer-to-peer crowdfunding: Information and the potential for disruption in consumer lending. Annual Review of Financial Economics, 7, pp.463-482.

NARANG, V., 2017. PAYMENTS BANKS IN INDIA: A STIMULUS TO FINANCIAL INCLUSION. CLEAR International Journal of Research in Commerce & Management, 8(5).

Nguyen, T.P.T. and Nghiem, S.H., 2016. Market concentration, diversification and bank performance in China and India: An application of the two-stage approach with double bootstrap. Managerial Finance, 42(10), pp.980-998.

Rai, S. and Bansal, S., 2015. Factors Explaining Corporate Social Responsibility Expenditure in India. Review of Market Integration, 7(1), pp.37-61.

Sharma, K., 2018. Growth And Development Of Retail Banking In India. Indian Rural Market: Opportunity and Challenges in the Global Context, 1(1), pp.217-232.

Srivatsa, H.S., 2015. Environmentally Sustainable Practices in Indian Banking Sectorm. J. of Management & Commerce, 2(2), pp.15-17.

Sutherland, A., 2015. The Effect of Borrower Information Sharing on Delinquencies: Evidence from the US Lending Market. The Journal of Equipment Lease Financing (Online), 33(1), p.A1.

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