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Budget 2021

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Payday lending may finally see some regulation as RBI sets up panel

Payday lending needed some rules, especially around terms of interest rates charged, industry insiders say. Now that the RBI has set up a committee, some action can be expected.

January 14, 2021 / 11:36 AM IST
RBI | Representative Image.

RBI | Representative Image.

Payday lending may soon see some regulatory action, industry insiders say, as some of these firms have been in the news for coercive collections, high-interest rates and fraudulent business practices.

“There could be some guidelines around payday lending, now that the central bank has formed a committee to look into the digital lending space,” said a founder of a fintech lending startup.

To meet an immediate need for cash, borrowers take small loans for a short term—normally from one payday to the other­, hence the name—but at exorbitant rates.

Taking cognisance of the issues faced by the sector, the Reserve Bank of India announced a committee on January 13 to look into business practices adopted by the digital lending sector.

Moneycontrol wrote on January 5 how the industry was battling an image issue with so many fraudulent apps doing the rounds and Chinese links getting established with the online lending sector.

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Payday lending has been at the receiving end of regulatory action the world over. These lenders have had trouble in the United States because of their very high-interest rates. In China, there was a regulatory crackdown on such platforms.

Also read: RBI’s warning to coercive digital lending apps: What borrowers must be aware of

“Given these entities were driven out from China, many are trying to replicate the business in India and other developing nations, most of them are operating in the unregulated space,” said the person quoted above.

He added that the need of the hour was to come out with an interest rate structure for short-duration loans, which would ensure that customers do not end up paying a huge amount of money for small loans. These loans typically pull consumers into a debt trap, he said.

Till some regulatory action is seen, the industry is trying to get digital lenders on the same platform and have a commonly adhered operational protocol in place to help the industry grow.

Also read: How app-based loan sharks lay death-traps for borrowers

“The big issue here is given so many NBFCs are getting involved, we cannot just say that this is a handiwork of some fraudulent apps, there is need to point out the correct business practices to lay consumers,” said another fintech executive on the condition of anonymity. Entrepreneurs chose to speak off the record since the matter is under regulatory supervision.

The industry has welcomed the RBI’s decision to set up a committee. Anuj Kacker, secretary of the Digital Lenders Association of India, an industry body, said that they would be happy to volunteer members if the committee needed assistance.

“It is important to take all views regarding the matter,” he added.

Most of the committee members have been drawn from the central bank. Jayant Kumar Dash, executive director of the bank, has been appointed the chairman, with Ajay Kumar Choudhury from the department of supervision, P Vasudevan from the department of payment and settlements, Manoranjan Mishra of the department of regulation as members.

Also read: Broke by month-end? Avoid taking payday loans to bridge the shortfall

Vikram Mehta, cofounder of Monexo, a peer-to-peer lending platform, and Rahul Sasi, a cybersecurity expert and founder of CloudSEK are also part of the committee, which doesn’t include anyone from the digital lending industry.

Mehta’s social media profile indicates that he was with Monexo till August 2019 and then moved on as a consultant.

Mehta also brings immense experience from his stints at Mastercard, HDFC Standard Life, Citibank among others. Sasi’s social media profile shows he is a dropout from Anna University and later founded cybersecurity firm CloudSEK in 2015.

“Considering the importance of digital lending towards the financial inclusion in the Indian economy on one hand, and the regulations and best practices required to ensure a transparent and favourable ecosystem for all stakeholders on the other, a move like this from RBI is much appreciated,” said Madhusudan Ekambaram, chief executive of lending platform KreditBee and cofounder of industry body FACE (Fintech Association for Consumer Empowerment).
Pratik Bhakta
first published: Jan 14, 2021 11:36 am

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