The RBI is keen for the government to come up with a new legislation to curb illegal digital lending in India. The central bank wants the government to step in after it found that of the 1,100 loan apps, 600 were illegal.
The RBI has also highlighted complaints of harassment by digital lending apps, many of which have turned out to be unauthorized and operated by offshore entities. Reports say a number of borrowers have committed suicide due to the apps and the ensuing harassment. The RBI had set up a Working Group on digital lending including lending through online platforms and mobile apps on January 13. The WG has submitted its report, with the thrust being on enhancing customer protection and making the digital lending ecosystem safe and sound, while encouraging innovation.
The WG noted that there have been unintended consequences on account of greater reliance on third-party lending service providers mis-selling to the unsuspecting customers, concerns over breach of data privacy, unethical business conduct and illegitimate operations. “While the current share of digital lending in overall credit pie of the financial sector is not significant for it to affect financial stability, the growth momentum has compelling stability implications. It is believed that ease of accessing digital financial services, technological innovations and cost-efficient business models will eventually lead to meteoric rise in the share of digital lending in the overall credit.”
The report acknowledges that during the pandemic-led growth of digital lending, unbridled extension of financial services to retail individuals is susceptible to a host of conduct and governance issues. “Mushrooming growth of technology companies extending and aiding financial services has made the regulatory role more challenging. In view of the ease of scalability, anonymity and velocity provided by technology, it has become imperative to address the existing and potential risks in the digital lending ecosystem without stifling innovation.”
The WG’s recommendations seek to protect the integrity of the system against entities that are not regulated and not authorized to carry out lending business. It believes an institutional mechanism will ensure the basic level of customer suitability, appropriateness and protection of data privacy. The report seeks to ensure that there is orderly growth in the digital lending ecosystem without it being unduly disruptive towards the existing players in the ecosystem. The idea is that the existing players in the digital lending realm should follow recommended standards of appropriateness to address conduct and technological issues.
The WG recommended for the setting up of a nodal agency to primarily verify the technological credentials of DLAs of the balance sheet lenders and LSPs operating in the digital lending ecosystem. The nodal agency can also maintain a public register of the verified apps on its website. The report says all loan servicing, repayments etc should be executed directly in a bank account of the balance sheet lender and disbursements should always be made into the bank account of the borrower.