In recent times, new digital lending platforms and mobile applications have emerged, promising quick and simple loans to individuals and small businesses. The Reserve Bank of India (RBI) has however urged caution against these unauthorized platforms due to their dubious practices. This article explores the rise of digital lending in India, its significance, issues that arise, measures taken by RBI, and suggested steps ahead.
Digital Lending: The New Wave in Indian Finance
Digital lending refers to lending through web platforms or mobile apps, utilizing technology for authentication and credit assessment. India’s digital lending market has undergone a significant expansion from USD 33 billion in FY15 to USD 150 billion in FY20, with estimates of reaching the USD 350-billion mark by FY23. Banks are tapping into this potential market with independent digital lending platforms, leveraging existing capabilities from traditional lending.
The Significance of Digital Lending
Digital lending assists in financial inclusion, meeting the huge unmet credit demand, especially in India’s microenterprise and low-income consumer segment. It facilitates a shift away from informal borrowings by simplifying the borrowing process. Many Indians resort to borrowing from family, friends, and moneylenders, sometimes at high interest rates, due to the flexibility and convenience of such loans. Furthermore, digital lending reduces the time spent on processing loan applications and can decrease overhead costs by 30-50%.
Issues with Digital Lending Platforms
Despite its advantages, a growing number of unauthorized digital lending platforms and mobile applications pose challenges. Complaints have been raised about excessive interest rates, hidden charges, high-handed recovery methods, and misuse of agreements to access borrowers’ mobile phone data.
RBI’s Measures Against Unauthorized Digital Lending
In response to rising concerns, RBI has laid down certain rules. Non-Banking Financial Companies (NBFCs) and banks must disclose the names of online platforms they are associated with. Digital lending platforms operating on behalf of Banks and NBFCs should reveal the Bank(s) or NBFC(s) they represent to customers upfront. The bank or NBFC must issue a sanction letter to borrowers before executing a loan agreement. Only banks, RBI registered NBFCs, and other entities regulated by state governments under statutory provisions are allowed to undertake legitimate public lending activities.
India’s Budding Digital Ecosystem
Indian banks have collaborated with Fintechs for better customer service. Furthermore, the Government of India has initiated programs like Unified Payments Interface, Jan Dhan Yojana, Aadhaar enabled Payment System, etc., driving a digital environment, particularly post-demonetization.
Steps for a Responsible Digital Lending Revolution
India stands on the brink of a digital lending revolution. A responsible approach can ensure optimal benefits. Clear guidelines are needed around the type, duration of possession, and use of data given the sensitive nature of consumer information accessed by several entities. Digital lenders should develop and adhere to a code of conduct that emphasizes integrity, transparency, and consumer protection, including standards for disclosure and grievance redressal. An agency tracking all digital loans and consumer/lender credit history could be established. Besides technical safeguards, educating and informing customers to increase awareness about digital lending is also paramount.