Digital Lending: It is time to save the golden goose from the wolves

There is no doubt that the digital lending sector has seen exponential growth in the country.

Digital lending has emerged as the key enabler of access to small and micro loans, however, the increasing menace caused by a few illegal lending apps have compromised the reputation of the whole sector. These illegal apps find new ways to entrap customers into their schemes and engage in predatory lending practices as well as charge exorbitant rates of interest from the users. This has resulted in a loss of trust in the ecosystem which needs to be gained back with a carefully curated approach which does not harm the genuine lending service providers while eliminating the bad actors.

There is no doubt that the digital lending sector has seen exponential growth in the country. It has grown from $9 billion in 2012 to $270 billion in 2022. According to a report by Experian, this sector has grown at a CAGR of 39.5 percent over the past 10 years with an estimation to reach $350 billion in 2023.

This fast pace of growth is because of the innovative solutions led by the genuine lenders who keep consumer interest at core and provide solutions which cater to all. However, in order to ensure that only genuine digital lending entities are operating in the country, there is a need for a framework which aims at eliminating the fraudulent apps.

In 2022, the government along with RBI initiated a process of whitelisting of digital lending apps as a result of which earlier this year almost 94 apps were banned. However, in this process, several legitimate apps also got banned which created a sense of uncertainty in the market.

Therefore, In order to avoid such a situation, a robust mechanism to verify these apps needs to be institutionalised by the government and regulator. A public whitelist which is constantly updated in this regard will help the users to be cognisant of the apps from where they take loans and also help the social media platforms and app marketplaces to allow only those apps to their platform which are authentic and legitimate.

The role of the self regulatory body and players here also assumes importance. If they can take it upon themselves to build a transparent and accountable mechanism for verification of these apps, it would immensely help the government and regulator.

One of the key issues in the digital lending sector is the lack of any nodal agency which verifies the authenticity of the apps. While banks and Non Banking Financial Companies(NBFCs) are regulated by the RBI, these fraudulent apps are operating in the grey area.

In 2022, RBI came up with the digital lending guidelines which had set out guardrails and obligations to be followed by entities engaging in the digital lending service. However, this guidelines is only applicable to regulated entities i.e bank and NBFCs. Even the facilitator apps which are engaged with NBFCs are not directly regulated by RBI. Therefore, it results in effectively no oversight on these fraudulent apps.

A report by the working group on digital lending recommended the creation of an independent body to institutionalise the process of verification of those apps, however, no progress has been made on that front. Further, the recent parliamentary standing committee report on cyber crimes also recommended that cyber protection authority as recommended in the report be given the task to verify the digital lending apps.

However, given that most of the digital lending apps are either NBFCs or are associated with them, either RBI or an independent body closely working with RBI should be given the task of oversight on these apps. RBI needs to institute accountability mechanisms from the apps and the lack of it becomes a problem for the users. There has to be a direct oversight mechanism for the digital lending service  providers.

While we work towards establishing a verification mechanism and appointing a nodal agency, there is a need to stress on consumer awareness as well. There have been instances where these fraudulent apps are being sideloaded on their mobile by consumers and then they get entrapped.

It is only through a process of detailed consumer awareness programmes led by each stakeholder in the ecosystem coupled with a whitelist that can help them to avoid getting into these traps.

Mushrooming of fraudulent lending apps is an issue which requires the attention and efforts from the whole ecosystem. It is the responsibility of all the stakeholders including the regulator, banks, NBFCs, and the fintech industry including leading apps to come together to chart out a plan to weed out the bad actors.