Digital Lending Norms in India
About:
- It entails financing through websites or mobile applications while utilising technology for authentication and credit scoring.
- By utilising current capabilities in traditional lending, banks have started their own independent digital lending platforms to enter into the digital lending market.
Significance:
- Specifically in India’s microenterprise and low-income consumer segments, financial inclusion aids in addressing the country’s enormous unmet credit need.
- Reduce Informal borrowing: By making the borrowing procedure simpler, it aids in lowering informal borrowing.
- Time Saving: It cuts down on the amount of time needed to process loan applications locally. Additionally, digital lending platforms have been shown to reduce overhead expenses by 30% to 50%.
Challenges:
- increasing number of unlicensed mobile and digital lending platforms, including:
- They impose exorbitant interest rates and additional hidden fees.
- They use offensive and obnoxious healing strategies.
- They abuse contracts to gain access to borrowers’ mobile phones’ data.
- Actions by RBI:
- Banks and Non-Banking Financial Companies (NBFCs) must identify the internet platforms they use.
- Additionally, the RBI has demanded that customers be informed up front of the name of any banks or NBFCs using any digital lending platforms on their behalf.
- Prior to the execution of the loan agreement, the central bank had additionally instructed lending platforms to provide a sanction letter to the borrower on the letterhead of the relevant bank or NBFC.
- Banks, NBFCs registered with the RBI, and other organisations subject to state government regulation may engage in lawful public lending activities.
The digital ecosystem in India:
- Digital channels now account for about 72% of Public Sector Banks’ (PSBs’) financial transactions, with the number of users doubling from 3.4 million in FY 2019–20 to 7.6 million in FY 2020–21.
- From 29% in FY 2018-19 to 76% in FY 2020-21, more financial transactions were made via home and mobile platforms.
Regarding the RBI Working Group on Digital Lending:
- According to the RBI, bank lending via digital channels is still in its infancy when compared to traditional channels (Rs 1.12 lakh crore via digital mode against Rs 53.08 lakh crore through the physical mode).
- While a greater percentage of lending (Rs 0.23 lakh crore via digital mode versus Rs 1.93 lakh crore through the physical form) occurs through digital mode for Non-Banking Financial Companies (NBFCs).
- NBFCs have been at the forefront of partnering digital lending while banks have been implementing more and more innovative techniques in digital operations.
Key suggestions:
- A nodal organisation that will be established after consulting with stakeholders should conduct a verification process on digital lending apps.
- to establish a Self-Regulatory Organization (SRO) to cover the players in the ecosystem of digital lending.
- The proposed SRO will establish a code of conduct that will regulate the use of unsolicited commercial communications for digital loans.
- the proposed SRO’s keeping a “negative list” of lenders as service providers.
- Loan payments ought to be made straight into borrowers’ bank accounts.
- All information will be kept on servers in India.
- The requisite transparency should be ensured by the documented algorithmic features utilised in digital lending.
Steps to Take Ahead:
- India is on the cusp of a revolution in digital financing, and by ensuring that this lending is carried out responsibly, we can guarantee that this revolution’s benefits are fulfilled.
- There must be clear rules on, for instance, the sort of data that can be retained, the length of time data can be held for, and restrictions on the use of data because many players have access to sensitive consumer data.
- Digital lenders should proactively create and adhere to a code of conduct that specifies the values of honesty, openness, and consumer protection and includes specific guidelines for disclosure and complaint resolution.
- It is possible to establish a company that monitors consumer and lender credit histories and all digital loans.
- In addition to putting in place technological precautions, it’s crucial to educate and teach clients so that they can spread the word about digital lending.
