RBI to soon come out with regulations for digi-lending

Subject: Economy

Section: Monetary Policy

The RBI’s working group (2021) on digital lending, including lending through online platforms and mobile apps, noted that while the current share of digital lending in overall credit pie is not significant to affect financial stability, the growth momentum has compelling stability implications.
It is believed that ease of accessing digital financial services, technological innovations and cost-efficient business models will lead to meteoric rise in the share of digital lending,
The main issue is protecting customers from widespread unethical practices.
The group also emphasized that mushrooming growth of technology companies extending and aiding financial services has made the regulatory role more challenging due to ease of scalability, anonymity and velocity provided by technology,
Das said the common characteristics of some inappropriate business models or strategies include inappropriate funding structure and building asset liability mismatches.

Digital lending

Digital lending refers to the online disbursal of loans where all processes, including loan approval and recovery, take place remotely, typically through mobile apps.
A borrower-friendly approach, reduced paperwork, high availability, and economic implications of the covid pandemic are the reasons for the increased surge in digital lending.
India’s digital lending market has seen a significant rise over the years.
The digital lending value increased from USD 33 billion in FY15 to USD 150 billion in FY20 and is expected to hit the USD 350-billion mark by FY23.

Significance of Digital Lending

Financial Inclusion: It helps in meeting the huge unmet credit need, particularly in the microenterprise and low-income consumer segment in India.
Reduce Borrowing from informal channels: It helps in reducing informal borrowings as it simplifies the process of borrowing.
Time Saving: It decreases time spent on working loan applications in-branch. Digital lending platforms have also been known to cut overhead costs by 30-50%.

Challenges associated with digital lending

Growing number of unauthorized digital lending platforms and mobile applications.
- They charge excessive rates of interest and additional hidden charges.
- They adopt unacceptable and high-handed recovery methods.
- They misuse agreements to access data on mobile phones of borrowers.
Repayment Challenge:
- Rising bad loans in the retail segment could be a big worry.
- Aggressive growth of digital lending at the cost of quality of lending can lead to deterioration of asset quality for banks below the tier-1 category.

Steps Taken by RBI

Non-Banking Financial Companies (NBFCs) and banks need to state the names of online platforms they are working with.
RBI has also mandated that digital lending platforms which are used on behalf of Banks and NBFCs should disclose the name of the Bank(s) or NBFC(s) upfront to the customers.
The central bank had also asked lending apps to issue a sanction letter to the borrower on the letter head of the bank/NBFC concerned before the execution of the loan agreement.
Legitimate public lending activities can be undertaken by banks, NBFCs registered with the RBI and other entities who are regulated by state governments under statutory provisions.