Digital credit is sobriquetted ‘Smart phone Cash’ due to its instant disbursement via smart phones. With a friendly KYC on your mobile app, the required cash is all yours. This digital avenue is the hot favourite of many MSME’s too. But all’s not well here. Digital money’s plus, friendly regulations, has started working against it lately with many illegal players entering the fray. It’s up to the regulators to take the call on this. But for the economy, with a projected business value of USD 350 billion by FY23 (USD 150 billion in FY20) digital lending is here to stay.
What is digital lending?
Digital lending through instant personal loan apps has changed the lending ecosystem forever. Here are the highlights:
- You just download the application from Google App stores and fill the basic details; generate an OTP and get instant cash.
- No filling of cumbersome loan application, documentation by signing on the stamp papers, giving securities.
- Digital Lending platforms through their websites and mobile apps provide cutting edge functionalities in lending such as video-KYC, Aadhaar-based KYC for authentication and credit evaluation.
- Digital loan platforms are using AI, ML, and big data analytics to collect and evaluate data of the prospective borrowers from multiple sources to evaluate the creditworthiness of a prospective borrower.
If the process is so simple and hassle free what are the issues?
The Issues in Digital Lending
Reserve Bank of India had received 7813 complaints from public during the period April 2021 to March 2022 and identified 600 illegal loan apps operating in India. The Finance Minister suggested the Reserve Bank of India (RBI) to prepare a ‘White list’ of legal loan apps and the Ministry of Electronics and Information Technology (MEITY) has been tasked with ensuring only such applications are available on app stores.
Unregulated instant loan services have typically targeted individuals from low-income groups who have no knowledge of financial implications of loans and loan defaults but looking for quick access to funds. As these digital loan platforms offer small-ticket loans of anywhere between ₹2,000 and ₹10,000, people are lured to these loan apps. These loan apps charge interest rates as high as 50% per annum, as well as similar late fee charges including all hidden charges. Further there is a ‘possibility of money laundering, tax evasions, breach of privacy and data, and misuse of unregulated payment aggregators, shell companies, defunct NBFCs for perpetrating such actions.
Hence the RBI was asked to ensure that registration of payment aggregators is completed within a timeframe and no un-registered payment aggregator be allowed to function after that, and the Ministry of Corporate Affairs will identify shell companies and de-register them to prevent their misuse.
Reserve Bank of India Steps in
RBI addressed various issues which erupted in the operations of digital lending platforms by issuing set of guidelines on August 10, 2022.
RBI notification focused on three main things.
- Regulating the entire lending chain
- Providing transparency to borrowers
- Defining good data privacy practices
The Future of Digital Lending
The framework laid out by the RBI has been immediately implemented.
Regulating the Chain: RBI has stipulated that all loan disbursements always be made into the bank account of the borrower, and repayments be executed directly in the bank accounts of regulated entities (banks/NBFCs/microfinance institutions). No money should flow or pass through any third-party pool accounts
Bringing Transparency: Lending agency (regulated entities) have to disclose total annual percentage rate (APR), which comprises the total interest rate on a loan, fees, origination charges, agency fees, and any other charges related to servicing the loan apart from providing all details in easy and understandable language.
Defining Privacy practice: As the “ data” is “sellable” or “magnetisable”, RBI has put together stringent data privacy practices that preclude regulated entities, lending service providers, digital lending applications, and any other platforms involved in the lending equation from using a borrower’s data for anything but the specific function it was meant for. A set of guidelines were issued
Regarding entities lending outside the purview of any statutory/ regulatory provisions like digital lending apps etc, the Reserve Bank of India had written to Central Government listing specific interventions that will help it curb illegitimate lending activity, including framing legislation to ban unregulated lending activities, setting up an independent body to ensure that only authorised and trusted DLAs (Digital Lending Apps) are used by consumers, and setting up a National Financial Crime Record Bureau, among other things.
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Do you think stringent regulations would bring back the hassles of traditional lending to the digital avenues? Why?
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1. Dhanbhoora, Zeus. (2022, June 15). What is digital lending and its future. [India Today Web Desk]
2. Joshi, Armaan. (2022, September 25). Best Instant Personal Loan Apps In India 2022. [Forbes Advisor]
3. Das, Shouvik. (2022, August 25). Google banned over 2,000 instant loan apps from Play Store in H1 2022. [Mint]
4. (2022, September 10). Nirmala Sitharaman initiates crackdown on illegal loan apps. [The Hindu Bureau]
5. (2022, August 10). Reserve Bank of India Press Releases.
6. Saxena, Aparajita. (2022, August 11). RBI’s debut guidelines on digital lending hits the right notes on protecting borrowers. [YOURSTORY]