RBI PANEL MOOTS LAW TO REGULATE DIGITAL LENDING
WHY IN NEWS?
- Recently, the Reserve Bank of India (RBI) Working Group (WG) Committee has made recommendations pertaining to Digital Lending, including a separate legislation to prevent illegal digital lending activities.
- The RBI constituted a WG on digital lending including lending through online platforms and mobile apps in January, 2021.
- The panel was set up in the backdrop of business conduct and customer protection concerns arising out of the spurt in digital lending activities.
ABOUT:
- The RBI says lending through digital mode relative to physical mode is still at a nascent stage in the case of banks (Rs 1.12 lakh crore via digital mode against Rs 53.08 lakh crore through the physical mode).
- Whereas for Non-Banking Financial Companies (NBFCs), a higher proportion of lending (Rs 0.23 lakh crore via digital mode against Rs 1.93 lakh crore through the physical mode) is happening through digital mode.
- While banks have been increasingly adopting innovative approaches in digital processes, NBFCs have been at the forefront of partnered digital lending.
KEY PROPOSALS:
- Digital lending apps should be subjected to a verification process by a nodal agency to be set up in consultation with stakeholders.
- To set up a Self-Regulatory Organisation (SRO) covering the participants in the digital lending ecosystem.
- The use of unsolicited commercial communications for digital loans to be governed by a code of conduct to be put in place by the proposed SRO.
- The maintenance of a ‘negative list’ of lending service providers by the proposed SRO.
- Disbursement of loans should be directly into bank accounts of borrowers.
- All data to be stored in servers located in India.
- Algorithmic features used in digital lending to be documented should ensure necessary transparency.
ABOUT DIGITAL LENDING:
- It consists of lending through web platforms or mobile apps, by taking advantage of technology for authentication and credit assessment.
- Banks have launched their own independent digital lending platforms to tap in the digital lending market by leveraging existing capabilities in traditional lending.
SIGNIFICANCE:
- 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%.
CHALLENGES:
- 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.
EASE REFORMS.
- India’s Digital Ecosystem:
- Nearly 72% of financial transactions of Public Sector Banks (PSBs) are done through digital channels, with doubling of customers active on digital channels from 3.4 crore in FY 2019-20 to 7.6 crore in FY 2020-21.
- The share of financial transactions undertaken through home and mobile channels has increased from 29% in FY 2018-19 to 76% in FY 2020-21.
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.
- 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.
- An agency can be created that tracks all digital loans and consumer/lender credit history.
- Apart from establishing technological safeguards, educating and training customers to spread awareness about digital lending is also important.