2030

RBI proposes new law to regulate digital lending


The Reserve Bank of India (RBI) has proposed new norms and asked the government to frame a new legislation to curb illegal digital lending in the country. The proposals come after a panel set up by the regulator found that there are 1,100 loan apps in various app stores, of which 600 are illegal.

The suggestions come in the wake of complaints of harassment by digital lending apps, many of which have turned out to be unauthorized and operated by offshore entities. Some of the borrowers have also committed suicide, blaming the apps of harassment. There have also been reports of digital lenders repatriating unlawful profits outside the country.

The recommendations, submitted by a working group on digital lending including lending through online platforms and mobile apps chaired by Jayant Kumar Dash, executive director, RBI, include having a nodal agency to verify all the digital lending apps and setting up a self-regulatory organisation.

The group has also suggested tighter norms for “buy now pay later” loans, a form of credit given at time of purchase. The proposal is to treat them as part of balance sheet lending, if it is not in the form of operational credit by merchants. “Since these products do not meet the requirements of traditional credit facilities, a suitable notification may be issued by the government of India in this regard,” the group said.

“The recommendations seek to protect the integrity of the system against entities that are not regulated and are not authorized to carry out lending business. The onus of subjecting third-party lending service providers to a standard protocol of business conduct would lie with the regulated entities to whom they are attached. Further, an institutional mechanism is envisaged to ensure the basic level of customer suitability, appropriateness and protection of data privacy,” the report said.

The panel said that the digital lending ecosystem comprises both balance sheet lenders (those who lend their own money) and marketplace lending (a platform that allows others to lend). Within these two forms of lending, there are peer-to-peer lending platforms, neo banks, and “buy now pay later” players.

“It is observed that lending through digital mode relative to physical mode is still at a nascent stage in case of banks (Rs 1.1 lakh crore via digital mode vis-à-vis Rs 53.1 lakh crore via physical mode) whereas for NBFCs, a higher proportion of lending (Rs 0.2 lakh crore via digital mode vis-à-vis Rs1.9 lakh crore via physical mode) is happening through digital mode,” the report said.

The FinTech Association for Consumer Empowerment, which was launched last year, and comprises digital lending platforms such as EarlySalary, KreditBee, Kissht, CashE and LoanTap, welcomed the proposed regulations. “SRO is the call of the hour to structure the industry and to set the rules for the fintech members and customers. FACE members have always abided with the disclosure of all relevant information including the interest rates, as it believes in transparency and proactive commitment to consumers builds brand trust. Data privacy is of utmost importance and should be strictly adhered to,” FACE said in a statement.

Experts, however, cautioned at regulations stifling innovation. “While subjecting third-party digital lending providers to certain standard protocols and regulations is key to protecting customer’s interest, this should not come at the cost of innovation and create entry barriers for startups in the fintech space,” said Jaikrishnan G, Partner, Financial Services Consulting at Grant Thornton Bharat. He added that new-age short-term liquid lending products have created a niche and are now filling in a critical credit void in the ecosystem. “A traditional lending framework cannot be applied on these products,” said Jaikrishnan.

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