Even as a Reserve Bank of India (RBI) working group is in the final stages of releasing fresh regulations for the digital lending industry, top industry officials told Moneycontrol that imposing tight regulations across the board could severely hurt the sector.
Instead, the regulator should focus on addressing unruly players in the digital lending industry and encourage more self regulation, they said.
“We had suggested that they look at the non-compliant ecosystem as there are a few players who are not playing by the rules,” said Anurag Jain, Founder & ED at KredX, and President of the Digital Lenders Association of India (DLAI).
“Also, we have recommended a self-regulatory framework for digital lending companies as hard regulations could impact the growth of the industry,” Jain said.
Over the last few years, the digital lending industry has grown by leaps and bounds both in terms of the number of lenders and the amount disbursed.
According to a report by Inc42 Plus, there are approximately 1,263 digital lending start-ups. Of these, 147 are venture-backed start-ups that have invested over $2.4 billion in venture capital in this space between 2014 and Q3FY20.
As per the India FinTech Report 2020 by GoMedici, there are 365 Fintechs in digital lending across the consumer lending, SME finance, aggregator and P2P lending space, as well as other areas.
The Covid-19 pandemic hit these companies even before the financial system recovered from the mess triggered by the IL&FS and DHFL crises. Digital lenders have witnessed a rise in stressed assets since the start of the pandemic.
An India Ratings report in July 2020 stated that collections of non-bank lenders were impacted by 15 percent in May 2021 and the pandemic exposed the weakness in digital lenders’ business models, particularly in collections and newer credit assessment methodologies.
Adding to their woes, illegal recovery practices by some of the digital lenders, which have led to a number of customer suicides, have invited the regulator’s wrath.
In June 2020, the RBI came out with a fair practice code for digital lenders. Subsequently, in January 2021, a working group was set up by the RBI to examine digital lending activities with four internal members and two external members. The working group is expected to come out with its final recommendations by the end of this month, RBI Governor Shaktikanta Das said during the post policy presser on August 6.
‘Target the wrongdoers’
Digital lenders have sought light-touch regulations from the RBI that they said would allow growth with sufficient checks.
Jain of KredX said introduction of a code of conduct by the RBI in line with the fair practice code issued by the regulator in May 2020 could help digital lenders. The root of the problem is unregulated and unlicensed operators acting outside the law and regulatory guidelines, he suggested.
A similar view was aired by Mandar Kagade, Founder & Principal at Black Dot Public Policy Advisors. “Extending the regulatory perimeter (in terms of interest-rate cap or curbing collection practices) would be ineffective, and worse, hurt the good guys that operate in compliance with the law,” said Kagade.
“The RBI can work with PGs and app stores (Google and Apple) to weed out unlicensed actors, thus disabling them from harming the consumer,” Kagade said. Elaborating, he said heavy-handed regulations could hurt the short-term personal-loan business segment and ultimately the thin-file consumers (those with little or no credit history) relying on this formal lending ecosystem.
The RBI Working Group could also possibly look at regulating some of the existing models and practices of intermediaries.
Most digital lenders have an FLDG (First Loan Default Guarantee) tie-up with lenders. FLDG, in fintech parlance, is a mechanism where the fintechs offer a guarantee to lenders.
As of now there are no RBI guidelines around FLDG as it is off the books; there has to be clarity on FLDG limits, said Vivek Iyer, Partner and National Leader, Financial Services Risk Advisory, Grant Thornton Bharat.
‘RBI needs to strike a balance’
According to Shilpa Mankar Ahluwalia, Partner at Shardul Amarchand Mangaldas, the RBI needs to strike a balance and the regulation should protect consumer interests besides creating a safer ecosystem and not cut off or hold back the supply of data to fintech platforms.
“Ultimately fintech platforms’ USP is to analyse data and use it productively to build and customise new products and target customer segments that traditional lenders have not been able to (tap),” Ahluwalia said.
Ganesh Rengaswamy, Managing Partner at Quona Capital, said digital lenders that have applied the first principles of lending are seeing a smaller impact compared to players treating lending as a growth engine.
“The regulatory leaning is more towards how digital can unlock opportunities for the underserved and MSMEs, and here credit has to be offered in a context as compared to a transactional solution,” Rengaswamy said.
If the RBI chooses to impose tight regulations, it could force a consolidation within the digital lending industry, said Iyer.
Heavy-handed regulations could imply higher costs of compliance for small digital lenders, which could impact their margins.
Ahluwalia adds: “Depending on the added costs of regulatory compliance we could see some amount of consolidation where big and small players consolidate on balance sheets and try to leverage economies of scale.”