Approach:
- Intro – define digital lending.
- Mention its scope.
- Point out the existing key concerns.
- Elaborate the RBI’s regulatory norms.
- Conclusion
Digital Lending refers to lending through web platforms or mobile apps by use of technology. It utilizes automated technologies and algorithms for customer acquisition, credit evaluation, decision making, authentication, disbursements and recovery. Not only does it lower costs but also ensures speedy disbursal.
Lending Service Providers (LSPs) act in partnership with Non-Banking Financial Companies (NBFCs) who disburse credit to the customer, making it a multi-sided platform.
Scope of digital lending in India: Digital lending is one of the fastest-growing fintech segments in India. It has grown exponentially from a volume of US$ 9 billion in 2012 to nearly US$ 110 billion in 2019. It is further expected that the digital lending market would reach a value of around US$ 350 billion by 2023. This business is mainly covered by fintech start-ups, neo-banks and Non-Banking Finance Companies (NBFCs).
Its customers particularly include small borrowers without a documented credit history and thus, not served by traditional financial institutions. Their product mix primarily imbibes short-term loans, especially those which have shorter tenures of less than 30 days.
Key concerns: First, in order to cement their presence in a space with multiple peers, 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.
Second, the absence of standardized disclosure and regulatory norms made it cumbersome to assess a participant’s operational legitimacy. Between January-February 2021, 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 INR 1,000 crore.
Also, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices are some of the other concerns associated with digital lending.
RBI’s new regulation:
- The RBI has divided the digital lenders into 3 groups: (a) Entities regulated by the RBI and permitted to carry out lending business; (b) Entities authorized to carry out lending according to other statutory/regulatory provisions but not regulated by the RBI; (c) Entities lending outside the purview of any statutory/regulatory provision.
- The central premise of the new guidelines is transparency.
- Lending only by Regulated Entities: Lending must be carried out by entities that are either regulated by the RBI or possess permission to operate under a relevant law.
- The RBI has mandated that all loan disbursals & repayments are to be executed directly between the bank accounts of the borrower and the entity, eliminating the involvement of LSP’s nodal pass-through account.
- Transparency about Cost of borrowing: The lenders would have to inform the borrower in a standardised format about all fees, charges and the all-inclusive cost of digital loans in the form of annual percentage rate (APR).
- Due Diligence: They also need to conduct an enhanced due diligence process before entering into a partnership with an LSP for digital lending.
- The RBI has specified that there cannot be automatic increase in credit limits without the borrower’s on-record explicit consent.
- Grievance Redressal: To address the need for a dedicated resolution framework, entities would have to appoint a grievance redressal officer. The ecosystem would also fall under the purview of the RBI’s Integrated Ombudsman Scheme (RB-IOS) if the complaint is not resolved within 30 days.
- Data Collection and Sharing: 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 guidelines also state that the regulated entities are required to ensure that any lending done through DLAs has to be reported to Credit Information Companies (CICs), irrespective of its nature or tenor. Lending through the Buy Now Pay Later (BNPL) mode also needs to be reported to CICs.
The share of digital lending may be small at present, but given their scalability they may soon become significant players. The regulations have done well to protect the borrowers’ interests without putting any undue pressure on lending entities or the platforms. The digital lending ecosystem has a great potential to further the financial inclusion goal.