RBI proposes new law to regulate digital lending

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    • The Reserve Bank of India (RBI) has proposed new norms and asked the government to frame new legislation to curb illegal digital lending in the country.
      • Digital lending is the process of availing credit online.

    About

    • RBI had constituted the working group on digital lending including lending through online platforms and mobile apps under the chairmanship of Jayant Kumar Dash, Executive Director, RBI.
    • The working group was set up in the backdrop of business conduct and customer protection concerns arising out of the increase in digital lending activities.
    • The working group has now submitted its recommendations.

    Digital Lending

    • About:
      • The RBI says lending through digital mode relative to physical mode is still at a nascent stage in the case of banks (Rs 1.12 lakh crore via digital mode against Rs 53.08 lakh crore through the physical mode).
      • Whereas for Non-Banking Financial Companies (NBFCs), a higher proportion of lending (Rs 0.23 lakh crore via digital mode against Rs 1.93 lakh crore through the physical mode) is happening through digital mode.
      • While banks have been increasingly adopting innovative approaches in digital processes, NBFCs have been at the forefront of partnered digital lending.
    • Key Proposals:
      • Digital lending apps should be subjected to a verification process by a nodal agency to be set up in consultation with stakeholders.
      • To set up a Self-Regulatory Organisation (SRO) covering the participants in the digital lending ecosystem.
      • The use of unsolicited commercial communications for digital loans to be governed by a code of conduct to be put in place by the proposed SRO.
      • The maintenance of a ‘negative list’ of lending service providers by the proposed SRO.
      • Disbursement of loans should be directly into the bank accounts of borrowers.
      • All data is to be stored in servers located in India.
      • Algorithmic features used in digital lending to be documented should ensure necessary transparency.

    Significance of Digital Lending

    • Digital lending is a powerful tool that can be used for financial inclusion. With new innovations underway, digital lending has enabled many Financial Service Providers a way to offer much better products to the masses at a much faster rate which is even more cost-efficient.
    • Digital lending can prove to be a tool acting towards the growth of higher quality financial services to underserved businesses and people.
    • Online lending has played a pivotal role in evading cumbersome red-tapism usually involved while availing loans offline in a traditional setting.
    • The online lending platforms have gained massive popularity among MSMEs post-Covid as they were unable to secure finance through traditional lending.

    Issues with Digital Lending

    • There are many gaps that are existent in this model of digital lending like any new business operation. 
    • There have been numerous instances of unscrupulous activities that have come to notice, especially during the pandemic where unauthorised lenders provided credit to customers without any collateral and at exorbitant rates coupled with unachievable deadlines to pay off these humongous debts.

    Source: FE