Digital lending norms

In News: Aiming to curb rising malpractices in the digital lending ecosystem, the Reserve Bank of India (RBI) issued guidelines for entities engaged in digital lending,

• The norms state that all digital loans must be disbursed and repaid through bank accounts of regulated entities only, without pass-through of lending service providers (LSPs) or other third parties.
• The norms follow the recommendations of a working group for digital lending, whose report was made public last November.
• The concerns of digital lending primarily relates to unbridled engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices.

The regulator classified digital lenders into three categories:

• entities regulated by the RBI and permitted to carry out lending business,
• entities authorised to carry out lending as per other statutory or regulatory provisions but not regulated by the RBI,
• and entities lending outside the purview of any statutory or regulatory provisions.
• The latest regulatory framework is focused on the digital lending ecosystem of RBI’s regulated entities (REs) and the LSPs engaged by them to extend credit facilitation services.
• As for entities falling in the second category, the respective regulator may consider formulating rules on digital lending, based on the recommendations of the working group.
• For entities in the third category, the working group has suggested specific legislative and institutional interventions for consideration by the government to curb illegitimate lending.
• Apart from direct disbursals and repayments of digital loans, the norms mandate that any fees or charges payable to LSPs in the credit intermediation process shall be paid directly by the RE and not by the borrower.
• A standardised key fact statement (KFS) must be provided to the borrower before executing the loan contract.
• The all-inclusive cost of digital loans in the form of annual percentage rate (APR) will have to be disclosed to borrowers.
• Automatic increases in credit limit without the explicit consent of borrowers has been prohibited.
• The loan contract must provide for a cooling-off or look-up period during which borrowers can exit digital loans by paying the principal and the proportionate APR without any penalty.

Digital Lending:

• It consists of lending through web platforms or mobile apps, by taking advantage of technology for authentication and credit assessment.
• India’s digital lending market has seen a significant rise over the years.
• The digital lending value increased from USD 33 billion in FY15 to USD 150 billion in FY20 and is expected to hit the USD 350-billion mark by FY23.
• Banks have launched their own independent digital lending platforms to tap in the digital lending market by leveraging existing capabilities in traditional lending.

Significance of Digital Lending:

• Financial Inclusion: It helps in meeting the huge unmet credit need, particularly in the microenterprise and low-income consumer segment in India.
• Reduce Borrowing from informal channels: It helps in reducing informal borrowings as it simplifies the process of borrowing.
• Time Saving: It decreases time spent on working loan applications in-branch. Digital lending platforms have also been known to cut overhead costs by 30-50%.

Issues with Digital Lending Platforms:

• Growing number of unauthorised digital lending platforms and mobile applications as:
• They charge excessive rates of interest and additional hidden charges.
• They adopt unacceptable and high-handed recovery methods.
• They misuse agreements to access data on mobile phones of borrowers.

Steps Taken by RBI:

• Non-Banking Financial Companies (NBFCs) and banks need to state the names of online platforms they are working with.
• RBI has also mandated that digital lending platforms which are used on behalf of Banks and NBFCs should disclose the name of the Bank(s) or NBFC(s) upfront to the customers.
• The central bank had also asked lending apps to issue a sanction letter to the borrower on the letter head of the bank/ NBFC concerned before the execution of the loan agreement.
• Legitimate public lending activities can be undertaken by banks, NBFCs registered with the RBI and other entities who are regulated by state governments under statutory provisions.

Way Forward

• India is on the verge of a digital lending revolution and making sure that this lending is done responsibly can ensure the fruits of this revolution are realized.
• As several players have access to sensitive consumer data, there must be clear guidelines around, for example, the type of data that can be held, the length of time data can be held for, and restrictions on the use of data.
• Digital lenders should proactively develop and commit to a code of conduct that outlines the principles of integrity, transparency and consumer protection, with clear standards of disclosure and grievance redressal.
• Apart from establishing technological safeguards, educating and training customers to spread awareness about digital lending is also important.

Source: Indian Express