The collateral damage in RBI’s crackdown on loan frenzy, KYC

Mumbai: The Reserve Bank of India’s (RBI) push for stricter compliance with know-your-customer (KYC) norms, and its crackdown against the ‘exuberance’ in personal loans have had an unlikely fallout: a dip in demand for off-roll workers.

These are employees who work for banks and non-bank lenders but are on the payrolls of large staffing companies that supply such workers. The RBI’s strictures have had a two-pronged impact on such hiring, industry officials and a banker said.

First, the regulator wants KYC to be more of an in-house activity, lowering demand for off-roll staff. Second, curbs against unsecured loans have also meant fewer third-party workers are needed to act as feet-on-street on behalf of the lenders.

“When a regulator comes down on a sector, the direct impact is on the jobs that are getting created," said Lohit Bhatia, president of workforce management at staffing company Quess Corp. According to Bhatia, the regulator’s decision to plug the flow of unsecured loans from fintechs and NBFCs (non-banking financial companies) to new-to-credit customers may not have the desired effect as such borrowers may move towards money lenders and unorganized players.

Among biggest employers

The BFSI sector is one of the biggest employers of third-party workforce provided by staffing firms. FMCG , manufacturing, e-commerce and quick commerce companies also hire such off-roll staff in large numbers. These workers are typically lower in hierarchy and help a company stay cost efficienct. Sales teams at junior levels are often drawn from this pool.

The banking regulator has been turning up the heat to strictly enforce KYC guidelines, which mandate banks and other lenders to ask for proofs of address and identity from customers before opening bank accounts. Mint reported in February how RBI has been focused on plugging gaps in KYC checks, chastising the entities it regulates through monetary penalties and even imposing business restrictions. The KYC guidelines act as a vital safeguard against money laundering by mapping each account to a bona-fide customer.

Over the past one year, RBI has also cracked down against unsecured loan frenzy, flagged deficiencies in gold-lending practices and has scruitinised fintechs for rolling out loans to customers already juggling multiple liabilities.

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“These measures have led to a slowdown in the sales teams deployed for personal loans, collection agents who typically take home salaries of ₹13,000-22,000 a month and also get incentives," Kartik Narayan, chief executive officer for staffing at TeamLease Services, told Mint. “KYC is also being done now only by the bank employees and not those on the third- party payrolls."

During TeamLease’s Q2 analyst call, Narayan had said that the company’s December quarter can be muted “on the backlog of caution in the BFSI sector…"

A senior banker at a private lender that while there is no specific guideline prohibiting using third-party employees for KYC verifications, to get it done in-house is the regulatory intent. The banker, who spoke on the condition of anonymity, said that KYC is now being done either in-house or through business correspondents.

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“The RBI is not happy with even business correspondents doing KYC checks unless it is in a deeply rural area," the banker said. “It is more like a soft signal that banks have got, with the RBI telling us to do these in-house as much as possible."

He explained that banks usually conduct only asset-side — for loans — KYC checks in urban areas through off-roll employees, while accounts are mostly opened by internal employees. “Apart from KYC, lenders also do not require that many people on the ground owing to the slowdown in unsecured lending," the banker said.

An emailed query to RBI remained unanswered.

‘Work has to be done’

Experts said that at the end of the day the work has to be done, whether it is outsourced or done through lenders’ shared services subsidiary or these third-party employees are eventually absorbed.

“The cost will go up as the economies of scale that you get when you outsource gets impacted; you will have to deal with high levels of attrition instead of relying on the staffing firm to replace the outsourced staff," said Bhavik Hathi, managing director at consulting firm Alvarez and Marsal.

Hathi said that some institutions did not exhibit good enough oversight which has spooked RBI and such lapses by regulated entities could create serious issues in the system.

Also read | Sebi's penalty on research analyst triggers KYC compliance fears

Industry executives said that banks and financial institutions often prefer conducting the entire KYC process in-house as digital implementation ensures lower costs, exceptional user experience, and effectively addresses data security concerns. But while banks are equipped to manage KYC internally, they may lack the necessary capabilities to execute KYC on the ground, they said.

“Digital KYC processes face challenges such as poor internet connectivity or technical glitches during verification, which may result in 10-15% of cases dropping out, leading to unsuccessful onboarding. This, however, marks an improvement from the dropout rate observed a few years ago," said Vishal Jain, chief executive of Manipal Business Solutions, a fintech that also provides KYC services.

Jain said that Manipal Business Solutions acts as a corporate business correspondent for banks, handling cases that drop out and require physical KYC. “Over the years, despite the increase in the success rate of digital KYC, it hasn't impacted our volumes, as the number of customers requiring KYC continues to grow."