In News
- Recently, the Reserve Bank of India (RBI) instituted a framework for regulating the digital lending landscape in the country.
About Digital Lending
- Digital Lending:
- Digital lending utilises automated technologies and algorithms for decision making, customer acquisition, disbursements and recovery.
- Not only does it lower costs but also ensures speedy disbursal.
- Digital lenders are of three kinds:
- Those regulated by the RBI
- Those authorised as per other statutory/regulatory provisions but not regulated by RBI
- Entities lending outside the purview of any statutory/ regulatory provisions.
- Working Mechanism:
- Lending Service Providers (LSPs) act in partnership with Non-Banking Financial Companies (NBFCs) who disburse credit (or a line of credit) to the customer using the former’s platform, making it a multi-sided platform.
- The latest set of regulations are based on recommendations received from its Working Group on ‘Digital Lending including lending through online platforms and mobile apps’ (WGDL).
- The working group will evaluate digital lending activities and assess the penetration and standards of outsourced digital lending activities in RBI regulated entities.
- Identify the risks posed by unregulated digital lending to financial stability.
- Regulated entities and consumers.
- Suggest regulatory changes to promote orderly growth of digital lending.
What are the new regulations?
- Transparency:
- Lending must be carried out by entities that are either regulated by the RBI or possess permission to operate under a relevant law.
- Loan disbursals and repayments:
- The RBI has mandated that all loan disbursals and repayments are to be executed directly between the bank accounts of the borrower and the entity.
- Thus, it eliminates the presence of a nodal pass-through or pool account of the LSP.
- Key fact statement (KFS):
- Before executing the contract, lenders would have to inform the borrower in a standardized format about all fees, charges as well as the annual percentage rate (APR).
- Annual rate:
- It refers to the annual rate that is charged for borrowing a loan and is inclusive of processing fees, penalties and all other charges associated with it.
- This would also help borrowers make better comparisons with industry peers.
- Cannot raise the credit limit:
- LSPs cannot raise the credit limit of their customers without prior consent.
- Grievance redressal officer:
- To address the need for a dedicated resolution framework, entities would have to appoint a grievance redressal officer.
- RB-IOS:
- The ecosystem would also fall under the purview of the RBI’s Integrated Ombudsman Scheme (RB-IOS) should the complaint not be resolved within 30 days of receipt.
- Regulation of Data:
- All data collected by the apps should be “need-based” and must be with prior and explicit consent of the borrower.
- Users can also revoke previously granted consent.
- The information to be collected must be stated in the privacy policy during enrolment.
- RBI has put forth that user consent would be mandatory for sharing any personal information with a third-party.
Major Issues
- LSPs often resort to reckless lending practices by endowing credit beyond a borrower’s repayment capacity.
- The risk is mitigated by spreading it to all users by charging higher interest rates.
- The absence of standardised disclosure and regulatory norms made it cumbersome to assess a participant’s operational legitimacy.
- There were about 1,100 lending apps available for Indian android users of which about 600 were illegal.
- They were either unregulated by the RBI or had NBFC partners with an asset size of less than 1,000 crore, prompting doubts on its operability.
- The space is largely dominated by NBFCs: Its customers particularly include small borrowers without a documented credit history and thus, not served by traditional financial institutions.
- Others: The concerns primarily relate to unbridled engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices.
Way Forward
- This regulation would also address concerns emanating from TechFin which are companies that are primarily tech-based service providers, say e-commerce, and also offer financial services.
- Share: The share of digital lending may be small at present, but given their scalability they may potentially become significant players soon.
- With the economic activity reviving at a decent pace post pandemic and our expectations of a GDP growth of 7.3% this fiscal it is expected that demand for loans across the credit ecosystem will be higher this fiscal despite higher inflation and interest rates.
- The guidelines are aimed at curbing rising malpractices in the digital lending ecosystem.
Source: TH
