The new digital lending norms rolled out by the Reserve Bank of India (RBI) will streamline the functioning of the microfinance industry and bring in changes in the operating model, experts told Moneycontrol. But it has failed to address the issue that has been created by the apps which don’t have a regulated entity backing them, say the experts.
On August 10, RBI published a list of guidelines to regulate digital lending with a view to protect borrowers and to mitigate the concerns arising from the growing number of frauds and unlawful activities within the sector.
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Change in operating model
Many industry leaders pointed out that some of the new norms are already being practiced by non-banking finance companies (NBFCs) in India. However, some of the rules will have a major impact on the operating model of the NBFCs.
“Providing a fact sheet about the loan extended, reporting to the credit information bureau, having a grievance redressal mechanism, etc., are already being practiced by MFIs. Most of the MFIs route their loan amount through proper bank accounts. Hence, these norms will not impact MFIs adversely in any way,” added Jiji Mammen ED & CEO, Sa-Dhan, a self-regulatory organisation (SRO) for the microfinance sector.
NBFCs need to bring in some changes in terms of their tie-ups with fintech companies as the regulations are heavily oriented towards fintechs. Thus, major changes are needed in terms of third-party involvement. “Both MFIs and NBFCs need to bring in modifications to their lending set-up to ensure conformity with the new guidelines. Their contractual relationship with fintechs will undergo a change clearly delineating the role of MFIs/NBFCs as lenders and fintechs as service providers and enablers of customer-oriented facilities,” said Jyoti Prakash Gadia, Managing Director, Resurgent India, a corporate financial advisory firm.
As per a report released by CRISIL on August 19, the new regulatory framework directs that all loan disbursements and repayments to strictly flow between the bank accounts of the borrower and the lender, without any pass-through to the account third parties. Alongside, clarifications on the use of first-loss default guarantees, which are still under further examination is an important feature of the business models for some.
According to experts, a couple of changes may need to be implemented in the buy now pay later (BNPL) model being followed by NBFCs. “The regulations on direct transfer of disbursements/repayments between borrowers and lenders will impact the ‘buy now, pay later’ services and prepaid instruments being offered. Business models will have to be tweaked to conform with the new regulations,” says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings.
Customers at the forefront
The new norms will definitely benefit customers as they will be protected from cheating, over leveraging, usurious interest rates leading to debt traps, etc, say experts. The fact sheet being provided to the borrowers will give them a clear understanding of the nature of the loan.
“With these new rules, customers will receive the annual percentage rate, which will help them recognise all the charges. It will also guarantee the safety of their data and protect them from being blindsided by the increase in interest rates. The cooling-off period will also be beneficial to the borrowers as it will stop the levy of any penalty,” said HP Singh, Chairman and Managing Director, Satin Creditcare Network Limited, an NBFC.
As per the experts, digital lending players are bought at par with MFIs via-a-vis the code of conduct and customer protection practices.
However, while the new norms have been designed to ensure better customer protection, they have failed to address some existing problems in the NBFCs.
“Most of the bad practices are done by the apps, which are not supposed to lend. The guidelines don’t specify what RBI is going to do about those apps. RBI has now left it to the customers to distinguish between regulated apps and unregulated apps,” Nageen Kommu, Founder and CEO, Digitap, a digital platform providing AI and tech support to NBFC, and MFIs.