Shown how half of the digital lending apps that are present for Android users have been found illegal: 600 out of 1,100- the RBI’s (Reserve Bank of India) initiative on formulating digital lenders has not come a day too soon. There is totally no doubt that fintech is transforming lending in India; gripping the Jan Dhan-Aadhaar-Mobile (JAM) trinity where they are making credit easily accessible to those who can never wish for a bank loan, especially in the unsecured lending space. Retail digital lending raised at a drastic 40% plus in the seven years till 2019.
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It is censorious digital apps continue to lend so since perforation of formal finance in the nation is low and by one calculation is almost less than 10% of the demand. However, we cannot allow the lending ecosystem to become vitiated by terrorized customers or defaults and we surely must rein in risks that are systemic. To this end, the working group of RBI has done immensely well to recommend the formation of a nodal agency to confirm the technological credentials of every lending apps and as well as dedicated legislation to check on illegal lending.
Key recommendations on digital lending
- Loan servicing: The balance-sheet lending through different apps must be restricted to RBI-regulated entities.
- All loan servicing must be executed directly in a bank account of the balance-sheet lender and disbursements must always be made into the bank account of the borrower.
- Nodal agencies: Nodal agencies should be totally set up to freely run digital lending applications through stringent verification processes.
- Legislative measures: The group has recommended that in the medium term, the government can consider bringing in legislation to prevent illegal lending activities by introducing the ‘Banning of Unregulated Lending Activities Act’.
- Technology standards: Certain baseline technology standards must be formulated when it comes to digital lending apps and compliance with those standards as a pre-condition.
- Algorithmic features used in digital lending must be documented to ensure transparency.
- The group recommends that auditable logs must be kept for every action so that a user performs on the app and that every single fintech app must be verified in a secured manner.
- Data collection and usage: Data must be collected from the borrower with concrete information on the purpose, usage, and even implication of such data and with consent.
- All such related data must be stored in servers located in the country, India.
- Reporting of lending activities: All the lending by regulated entities (REs) through lending apps should be reported to credit bureaus.
- Interest calculation: Interest should be duly calculated on the ground of the actual number of days and no prepayment penal rate of interest for short-term consumer credit.
- Shaping the Self-Regulatory Organisations (SRO): Standardised code of conduct for recovery needs to be duly framed by the proposed SRO and even in consultation with RBI.
- The group solely recommended the maintenance of a ‘negative list’ of Lending Service Providers by the proposed SRO.
The panel wants to encourage more legitimate lenders and at the same time improve customer security protection and even make the digital lending ecosystem innovative as well as safe. The digital lending market in the nation is growing very fast and with the Fourth Industrial Revolution, it is just a matter of time for a good shift from digital-too to digital-first to digital-only. Now it is time for the digital apps to abide by the rules and self-regulate themselves. As the world of fintech increases, RBI must arm itself with the needed technology and even technical expertise that is needed to keep track of the lending apps on the real-time ground.