In a bid to address the concerns arising out of the spurt in digital lending activities and malpractices by certain digital lending apps, the Reserve Bank of India (RBI) released a report by the working group it had constituted on digital lending on January 13, 2021.
The working group has made recommendations on three fronts – legal and regulatory, technology and financial consumer protection. The recommendations aim at ensuring that customers borrow from only verified and authentic mediums and the fintechs that fall under the purview of these norms include credit and Buy Now Pay Later (BNPL) players.
While the industry had formed the Digital Lenders Association of India (DLAI) and had laid down a code of conduct to be followed to ensure self-regulation, clear guidelines from RBI were much awaited to help eliminate fraud apps.
“These recommendations are about putting in place structure for the digital lending industry and maybe putting some reins in place so that while the industry is growing, you're able to look at more responsible lending,” said Anurag Jain, Founder & ED at KredX, and President of the Digital Lenders Association of India (DLAI).
The working group which was headed by RBI Executive Director Jayant Kumar Dash recommended setting up a nodal agency which will primarily verify the technological credentials of lenders in the digital lending ecosystem and also the constitution of a Self-Regulatory Organisation (SRO) covering these participants.
Jain added, “This is a welcome move. The SRO is very much required for the digital lending industry because it is growing at a fast pace.”
As per findings of the working group, 600 of the 1,100 loan apps on Indian app stores were illegal. In view of this, the group has also recommended a public register of verified apps to be maintained.
“The most important part is to differentiate the good ones from the bad ones. For that we have to build a list of process so that the good ones have to stay in line to prove themselves. The SRO comes in the picture to ensure these processes are followed correctly,” said Rahul Sasi who was a member of the working group and is the founder of CloudSEK.
The suggestions include that balance sheet lending through these apps should be restricted to entities regulated and authorised by RBI. 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, the report added.
“The aim is to ensure that the transaction is happening through regulated entities. It goes directly to the borrower and from borrower it comes directly to the regulated entity when repaid,” said KredX’s Jain.
The industry is hoping that these differentiating and clear recommendations once approved as guidelines will help will eliminate loan sharks and curb unfair practices by a few that is impacting the rest of the industry.
Gaurav Chopra, Founder and CEO of online personal loan platform IndiaLends and a founding member of DLAI said, “The recommendation to provide a key fact statement in a standardised format including the Annual Percentage Rate will give a better perspective to borrowers about the high percentage rate they are willing to bear.”
“Overall, the report seeks to safeguard consumers from unregulated digital lenders who have the potential to exploit borrowers with unfair or predatory terms.”A final view will be taken on these recommendations by the RBI after inviting comments from stakeholders and members of the public which have to be submitted by December 31, 2021.