This article has been written by Nikhil Rathore a 3rd year student of SVKM’s | NMIMS | SCHOOL OF LAW | INODRE

Introduction 

Consumer credit plays a critical role in driving economic activity in a country and raising people’s living standards. In India, the demand for credit has grown with a huge spike in recent years, as India has become the third largest economy in the world in terms of purchasing power parity (PPP) and the fifth largest economy in terms of the exchange rate. The increase in the credit power of the customer lies in disposable income, financial inclusion initiatives, and increasing access to digital financial services and many more factors, as India’s growth is estimated to be 8-10% annually (FICCI 2023), and when discussing financial inclusion, digital payment transactions have increased in India by 132% in FY23 compared to FY22(RBI Data,2023)[1].  With this amazing number showing the increasing power and demand for credit in India also creates concern regarding the potential borrower’s exploitation and irresponsible lending practices that are not structured in India, but before discussing the issues and rights available to consumers in Indian statutes, let us first understand the term consumer credit? 

The consumer credit term refers to the credit services that a person avails from the banks for personal needs without maintaining any security. consumer credit is used in many different forms globally the most prevalent type of consumer credit is close-end loans which typically are loans taken for school, automobile, and personal loans which is to be paid within a specific time frame given by the bank and the open-ended loans such as credit cards, master cards, visa card the rational for this cards is that the customer can further purchase with a specific time given for the payment if the consumer fault in it the due amount with interest is carried forward to the following months let us understand this credits briefly[2].

Types of Consumer credit

2. Closed-end credit, also known as installment credit, offers a defined loan amount, interest rate, and repayment schedule for fixed installments over a given period. When the loan is entirely returned, the credit line shuts and you must reapply for additional borrowing. Examples of closed-end credit include mortgages that are used to acquire property and typically have extended payback terms (15-30 years). Car loans are used to acquire vehicles, and typically have repayment lengths of to 2-7 years. Personal loans can be used for debt consolidation, home repairs, and significant purchases. Repayment periods vary based on loan size and purpose. Student loans are used to finance education, with payback durations changing based on the loan type and quantity.
3. Open-end credit, also known as revolving credit, has a pre-approved credit limit and a variable interest rate. This allows for ongoing borrowing and repayment cycles within the limits. You only pay interest in the amount you use, and the credit line will remain open as long as you make the minimum monthly payments. Examples of open-end credit include credit cards, which provide flexible borrowing for a variety of transactions with monthly bill listing charges and minimum payments. Lines of credit provide access to a specified credit amount that can be drawn and returned as needed. They are commonly used for home equity lines of credit (HELOCs) and business loans.

Additional forms of consumer credit

• Secured loans require security, such as a house or car, to ensure repayment, whereas unsecured loans rely only on credit.
• Retail credit is credit provided by retailers at the point of purchase of certain goods or services.
• Microfinance provides small loans to low-income individuals or groups with flexible repayment terms.

A brief history of consumer credit in India

Consumer credit may seem to be a modern phenomenon, but it is more than 5000 years old, and there is much historical evidence that the world was borrowing for a variety of reasons before the credit score became widely used. The Arthasastra (attributed to Kautilya), an ancient Indian political treatise from the 4th or 3rd century BC, mentions creditors, lenders, and interest rates. Banks emerged throughout India, beginning in the 12th century. Hundis, or the bills of exchange issued by Indian bankers, are used in international trade. This was to 2-3 centuries before Western European bankers produced their trade bills. According to the Western media, the first bank to be established on our planet was Italian. It was founded in Siena in 1472 under the name of Monte dei Paschi. However, banks have been around India for many years. W.E. Preston, a member of the Royal Commission on Indian Currency and Finance established in 1926, stated that “….it may be accepted that a system of banking that was eminently suited to India’s then requirements was in force in that country many centuries before the science of banking became an accomplished fact in England[3].”

Impact of consumer credit on the Indian economy

India is among the world’s fastest expanding economies; however, there is a substantial disparity in access to formal finance, particularly when compared with other industrialized countries. Banks and financial institutions (FIs) strive to bridge this gap by providing new payment products and mechanisms that will make formal credit more accessible. Historically, formal credit has been limited to financial items, such as mortgages, vehicle loans, and personal loans. Banks and financial institutions (FIs) have recently shifted their attention to instruments such as credit cards, buy now, pay later (BNPL), and credit EMIs. New Fintech companies have disrupted the industry by delivering new and creative goods and services to customers. Credit cards, BNPL, and credit EMIs have seen significant issuance and use increase. Traditional financial institutions and new start-ups concentrate on gaining new clients by providing loans to unbanked/underserved groups.

India has always been a debt card market. However, the increase in credit card issuances over the previous decade has altered this narrative, and credit cards are now widely utilized. This increase is propelled by the different goods and services provided by financial institutions, which are increasingly utilized by clients, particularly the millennial demographic. Credit card issuance has increased dramatically in India over the previous four years, with a compound annual growth rate (CAGR) of 20%. The number of credit cardholders climbed from 29 million in March 2017 to 62 million in March 2021. This increased by 26% and 23% in 2019 and 2020, respectively[4]. However, the COVID-19 pandemic has hampered the development rate of India’s credit card business, which expanded by just 7% in 2020-21. The growth rate is likely to increase somewhat in FY21-22, although it will remain weak owing to the limits on card issuing imposed by several big banks and payment networks. Similarly, credit card transactions grew at a CAGR of 16% from 2019-20 to but returned to 2018-19 levels in FY20-21, The growth rate was low in the first half of 2020-21, but it picked up in the second half.

The ((UPI) has emerged as one of India’s most popular payment systems. In 2020-21, the volume of UPI transactions was much larger than that of debit and credit cards. However, the value of transactions reported over the same time period was consistent across all three payment methods. Loan books for Unsecured Products increased at a CAGR of 38% from 2017 to 2020, while Secured Products only rose at a CAGR of 17%. Between FY18 and FY20, newly sanctioned loans increased by 39% due to rising consumerism and financial institutions. Unsecured loans, the largest contributor, climbed to a CAGR of 49 percent. Tier 3 and 4 markets have seen increased credit growth. These areas have seen a significant increase in low-cost, high-volume loan items, such as two-wheelers, entry-level vehicles, and inexpensive housing. Metros continues to be the largest lending market because of their higher working population. In the second quarter of 2020-21, the Indian economy contracted by 7.5%, exceeding expectations. A V-shaped rebound started after April 2020, and the current fiscal year was likely to be characterized by strong economic growth. Legacy banking systems are giving way to technology-driven lending platforms that provide personalized financial goods and services to the general public, and Rural India’s rising earnings have increased the demand for micro insurance.

Rights, Liabilities, and the protection given under Indian Laws:

While consumer credit boosts economic activity and strengthens people, it also confers rights and duties to both the borrower and lender. Understanding these factors is critical for prudent borrowing and lending decisions.

Consumer’s Rights:

• Receive clear and accurate information on loan terms, interest rates, fees, repercussions, and repayment expectations before signing an agreement.
• Fairness: Creditors cannot discriminate based on race, gender, religion, or ethnicity. They must analyze creditworthiness using objective criteria.
• Lenders and credit bureaus must secure personal financial information. You can see and challenge mistakes in your credit report.
• You may register a complaint and seek remedies if you experience unfair practices or erroneous credit information.

Consumer Liabilities: 

• Repayment: You must return the borrowed amount, including interest and fees, on time and according to agreed-upon conditions. Failure to do so may result in late payment penalties, harm to credit rating, and legal action.
• Use credit responsibly by borrowing only what you have the ability to pay back within your budget.
• Before signing a credit arrangement, ensure that you understand its terms and conditions. Please feel free to ask for clarification.
• Maintaining a strong credit score through careful credit management and regular payments leads to better borrowing possibilities and interest rates.

With the rights and liabilities, protection is also given to credit users in Indian laws, such as  The Banking Regulation Act of 1949, which enables the RBI to govern and oversee banks, establishing norms for ethical lending practices and transparency obligations[5]. The 2019 Consumer Protection Act protects consumers by requiring equitable and open terms of service, grievance redressal methods, and prohibiting unfair commercial practice[6]. The RBI’s fair practice code for lenders outlines standards for banks on fair lending practices, including the disclosure of terms and circumstances, grievance redressal, and responsible collection[7]. The Microfinance Institutions (MFI) Regulations of 2011 regulate the microfinance industry to avoid overindebtedness and safeguard vulnerable borrowers[8]. Analyzing the strengths and weaknesses of these legal systems has various advantages in safeguarding consumer rights and various flaws.

Banks are required by law to provide loan information such as interest rates, processing costs, and repayment conditions. Banks have dedicated grievance redressal procedures and external ombudsman programs to resolve complaints[9]. Laws prohibit deceptive ads, unjust contract conditions, and forceful collection techniques. However, the limited scope of regulatory regulations sometimes only covers certain credit categories, creating gaps in consumer protection. Weak enforcement procedures may impair the effective execution of rules. New regulations are required to mitigate risks and guarantee transparency in emerging digital lending platforms. The existing debt collection rules may be severe for borrowers, posing ethical difficulties.

Conclusion

In recent years, significant developments have been made for better functioning and regulation, such as The RBI’s Framework for Regulation of Prepaid Payment Instruments (PPIs), which aims to reduce risks connected with digital lending platforms. The proposed revisions to the Consumer Protection Act aimed to enhance grievance redressal and empower customers. Calls for the united financial ombudsmen are gaining momentum. In India, a market with a growing economy, the country lacks proper statutes and processes for controlling, which I believe can be curbed by improved enforcement mechanisms, which means dedicated regulatory organizations and stronger penalties for noncompliance may help to increase regulatory compliance. Expanding regulatory safeguards to include all credit categories and addressing digital lending difficulties. Streamline grievance redressal processes for speedy settlement of issues. Improving financial literacy by educating borrowers about credit products and appropriate borrowing habits. Reforming debt collection laws to balance creditor interests with the equitable treatment of debtors. These are crucial steps in fostering a responsible and inclusive credit market that benefits both borrowers and lenders in India. 

References:

1. Consumer credit in India This article was originally written by Sanjukta Bhattacharya and published on February 21, 2012, on the SSRN website. The link for the same is herein. < https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2008587> 
2. Banking Services and Consumer Laws This article was originally written by Utsav Mukherjee and published in June 2008 on the SSRN website. The link for the same is herein < https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1143827> 
3. The History of Consumer Credit in One Giant Infographic on website <https://www.visualcapitalist.com/historyconsume -credit-one-infographic/#google_vignette> 
4. Blog: India’s consumer credit market is projected to grow at a higher rate than most major economies worldwide, according to the latest Experian-Invest India Credit Ecosystem Review report on the website

< https://www.experianplc.com/newsroom/press-releases/2021/india-s-consumer-credit-market-projected-to-grow-at-a-higher-rate-than-most-major-economies-worldwide-according-to-latest-experian-invest-india-credit-ecosystem-review-report> 

1. A New Framework for Financial Consumer Protection in India This article was originally written by Anand Sahasranaman, Deepti George, Darshana Rajendran, and Vishnu Prasad on the DVARA website. The link for the same is herein< https://www.dvara.com/research/wp-content/uploads/2013/06/A-New-Framework-for-Financial-Consumer-Protection-in-India-IFF-Position-Paper.pdf> 
2. Consumer Credit Protection Act < https://www.ojp.gov/pdffiles1/Digitization/47227NCJRS.pdf> 
3. RBI’s Framework for Regulation of Prepaid Payment Instruments (PPIs)< https://www.rbi.org.in/scripts/bs_viewmasdirections.aspx?id=12156> 
4. Microfinance Institutions (MFI) Regulations, 2011 https://www.cuts-ccier.org/pdf/Regulation_of_Microfinance_Institutions_in_India.pdf 
5. Banking Regulation Act,1949https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIA1934170510.PDF