Data privacy, mis-selling, harsh recovery tactics used by online lending apps have surfaced as major consumer grievances. The Financial Stability and Development Council (FSDC) meeting held recently discussed concerns over the mushrooming growth of such fintech firms.
Key Issues Associated With Online Lenders
Poor Data Protection
- Lack of adequate safeguards for borrowers’ sensitive personal information like contacts, location, photos etc.
- Algorithms used to discern alternative data also likely compromise individuals’ digital footprints.
Overcharging and Harassment
- Exorbitantly high hidden charges leading borrowers into debt traps.
- Aggressive recovery practices including public shaming & harassment over defaults flouting RBI Fair Practices Code.
Money Laundering Risks
- Suspicion of routing overseas funds illegally using these fintech lenders.
- Gaps in KYC processes may facilitate terror funding, violation of foreign exchange rules.
The following table highlights current status quo:
| Particular | Details |
| Domestic India-focused online lending apps | 1,100+ |
| Projected Compound Annual Growth Rate of online lending | 12% |
| Expected lending portfolio size by 2024 | US$ 350 billion |
| Current outstanding loans per borrower | ₹10,000 – ₹15,0000 |
Regulatory Framework on Online Lending
There are some aspects currently not addressed holistically:
- Data harvesting and usage by fintech firms and their third-party partners.
- Fair disclosure of all terms and conditions by online lenders.
- Grievance redressal mechanisms in case of any disputes.
Key Developments
In light of concerns raised about illegal lending apps, the authorities have taken following steps:
- RBI constituted a working group chaired by CEO, IDRBT to study regulatory framework and suggest measures.
- MCA ordered Google and Apple to remove hundreds of illegal lending apps from app stores.
- States including Telangana setting up SITs to investigate data theft and harassment complaints.
Framework for Redressal
The following key principles proposed for regulating online lending platforms:
Robust Customer Verification Process
- Demand detailed key documents from borrowers for reliable KYC corroborations.
Legal Recognition
- Mandate all fintech lenders to register with central repository system.
Transparency in Interest Rates & Billing Cycle
- Establish guidelines for standardised and upfront disclosure of all applicable rates, fees, taxes to counter overcharging.
Responsible Data Usage
- Define purpose limitation, access control, accountability dimensions for borrowers’ information usage.
Initiatives to Spread Financial Services Access
- Promoting self-regulation practices by fintech entities through an industry association or independent body overseeing user interest.
- Encouraging partnerships between digital lenders with traditional banks and NBFCs to assimilate positive aspects like operational agility, straight-through processes.
- Harnessing technologies like machine learning, predictive analysis for enabling appropriate last-mile credit delivery cost-efficiently.
Consumer Financial Literacy
- Advocating responsible borrowing behavior among citizens through multimedia literacy initiatives.
- Cautioning against unvetted lending apps and sharing best practices for identifying legitimate lenders.
- Assisting users approach relevant authorities for grievance management.
Global Regulatory Approach
Key international policy measures in this area:
Singapore
- Fintech firms mandated to be individually licensed and display unique identifier.
China
- Tight surveillance mechanisms like centralized credit reporting systems.
- Stringent data collection restrictions around usage bounds.
United Kingdom
- ‘Sandbox’ arrangements for testing innovations under temporary relaxations.
- Promoting self-regulating voluntary codes of conduct.
India could adopt global best practices while customizing them for domestic financial landscape through the FSDC’s oversight.
Latest Developments
- RBI panel on digital lending in 2023 submitted report proposing statute for digital lending, verification of lending apps by banks.
- Over 2,000 apps available on Android Play Store in finance category as of January 2024 as per investigation agencies.
- State Bank of India blocked its Unified Payment Interface (UPI) services for channels associated with illegal lending apps.
- Number of complaints received by Cyber Crime police stations across India related to lending apps – over 3,200 in 2022, up from 800 in 2020.
- Top unauthorized Chinese apps found violating RBI guidelines: Koko Loan, Easy Loan, CashBus.
- Data and documents extracted illegally by rogue apps as per Delhi police – personal photos, contact lists, one-time passwords.
- Maximum harassment complaints received from Andhra Pradesh, Karnataka, UP, Telangana: nearly 450 in late 2023.
- Hyderabad police probing nexus between ex-telecallers fired by finance firms and illegal lending apps.
Formulating clear-cut rules aligned to data protection, privacy and consumer rights aspirations outlined in laws like the Personal Data Protection Bill remains vital to enable lawful innovation using emerging technologies while engendering trust in the financial ecosystem. The FSDC is hence well-placed to enforce compliance environment for online lending industry.
