Recently, the Reserve Bank of India (RBI) Working Group (WG) Committee has issued recommendations for digital lending. This move is in light of a need for legislation to curb illegal activities within this sector. A Working Group on digital lending, involving online platforms and mobile apps, was set up by the RBI in January 2021. The WG was constituted amid heightened issues related to business conduct and customer protection due to a surge in digital lending activities.
Digital vs Physical Mode of Lending: A Comparative Analysis
According to the RBI, digital lending is still in a budding state compared to physical mode lending for banks, with Rs 1.12 lakh crore lent digitally against Rs 53.08 lakh crore through physical mode. However, for Non-Banking Financial Companies (NBFCs), digital mode sees higher activity, with loans totalling Rs 0.23 lakh crore against Rs 1.93 lakh crore via physical mode. While banks are gradually adopting innovative approaches towards digital processes, NBFCs are leading the charge in partnered digital lending.
Key Proposals Set Forth by the RBI Working Group
Proposals from the RBI Working Group include the creation of a nodal agency to verify digital lending apps, setting up a Self-Regulatory Organisation (SRO) for all players in the digital lending ecosystem, and implementing a code of conduct to govern unsolicited commercial communications regarding digital loans. Additionally, there’s a proposal to maintain a ‘negative list’ of lending service providers and ensure that loans disbursed go directly into the bank accounts of borrowers. Other essential guidelines include storing all data on servers located within India and documenting algorithm features used in digital lending to maintain transparency.
The Evolution and Significance of Digital Lending
Digital lending involves using technology for credit assessment and authentication through mobile apps or web platforms. Many banks have introduced independent digital lending platforms to leverage their capabilities in traditional lending. This initiative helps meet the significant unmet credit needs, especially in the microenterprise and low-income consumer segments. Digital lending simplifies borrowing, thus reducing informal borrowings, saves time processing loan applications, and slims overhead costs by 30-50%.
The Challenges in the Digital Lending Landscape
Despite its positive impacts, digital lending has its share of challenges. The primary concerns include a growing number of unauthorized digital lending platforms that charge exorbitant interest rates and hidden charges, use aggressive recovery methods, and misuse agreements to gain access to borrowers’ data on their mobile phones.
Steps Taken by RBI to Enhance Regulation in Digital Lending
The RBI has mandated that all banks and Non-Banking Financial Companies (NBFCs) must disclose the names of online platforms they are affiliated with. Furthermore, lending apps working on behalf of banks and NBFCs should notify customers about their associations with specific banks or NBFCs. The central bank also insists on issuing a sanction letter to borrowers before executing a loan agreement. Public lending activities are legal only if carried out by entities regulated by state governments, banks, or registered NBFCs with the RBI.
India’s Progress in the Digital Ecosystem
In India, about 72% of public sector bank transactions are conducted through digital channels—doubling the number of users active on digital channels from 3.4 crore in FY 2019-20 to 7.6 crore in FY 2020-21. The proportion of financial transactions done through home and mobile channels has risen from 29% in FY 2018-19 to 76% in FY 2020-21.
Strategic Steps Towards the Future of Digital Lending
As India edges closer to a digital lending revolution, ensuring responsible lending is paramount. With multiple players having access to sensitive consumer data, clear guidelines around data handling are crucial. Digital lenders should develop and adhere to a code of conduct that emphasizes integrity, transparency, and consumer protection, with clear disclosure standards and grievance redressal. A dedicated agency could be established to track all digital loans and credit history. In addition to incorporating technological safeguards, public awareness and education about digital lending are also important.
