RBI panel moots law to regulate digital lending:

GS Paper 3:

Topics Covered: Cyber security related issues.

Context:

Lending through digital mode relative to physical mode in India is still at a nascent stage in case of banks (Rs 1.12 lakh crore via digital mode vis-à-vis Rs 53.08 lakh crore via physical mode).

• However, the overall volume of disbursement through digital mode for the sampled entities has exhibited a growth of more than twelve-fold between 2017 and 2020 (from Rs 11,671 crore to Rs 1.41 lakh crore).
• Industry leaders say the strong growth in digital lending indicates the huge untapped credit potential in India which can be bridged efficiently through the use of technology.

So, experts suggest bringing digital lenders under RBI regulation will help weed out the bad apples and ensure only serious players survive as cost compliance may be too high for the mischief makers.

Main issues affecting the industry:

The typical modus operandi of these companies is to lure customers by small-size loans of Rs 5,000, which can be paid back in a couple of weeks with some interest — typically of Rs 500 per month.

• However, if the borrower fails to re pay this amount, it gets compounded at 120% per annum (10% per month), making it difficult for the borrower to repay.
• This loan is sometimes masked as a service called Buy Now, Pay Later (BNPL), which allows shoppers to buy something but pay for it later within a stipulated interest-free period in three or more instalments. These loans mostly target young, new-to-credit, cash-strapped millennials.

RBI working group:

A Reserve Bank of India (RBI) Working Group (WG) on digital lending, including lending through online platforms and mobile apps submitted its recommendations in November this year.

Key recommendations:

1. A separate legislation should be enacted to oversee such lending.
2. Setup a nodal agency to vet the Digital Lending Apps.
3. A Self-Regulatory Organisation should be set up for participants in the digital lending ecosystem.
4. Develop certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions.
5. Disbursement of loans should be made directly into the bank accounts of borrowers and servicing of loans should be done only through the bank accounts of the digital lenders.
6. All data collection must require the prior consent of borrowers and come ‘with verifiable audit trails’ and the data itself ought to be stored locally.

Benefits of digital lending:

• Digital lending has the potential to make access to financial products and services more fair, efficient and inclusive.
• From a peripheral supporting role a few years ago, FinTech-led innovation is now at the core of the design, pricing and delivery of financial products and services.

Need of the hour:

A balanced approach needs to be followed so that the regulatory framework supports innovation while ensuring data security, privacy, confidentiality and consumer protection.

What are the issues wrt digital lending apps?

1. They attract borrowers with promise of loans in a quick and hassle-free manner.
2. But, Excessive rates of interest and additional hidden charges are demanded from borrowers.
3. Such platforms adopt unacceptable and high-handed recovery methods.
4. They misuse agreements to access data on the mobile phones of the borrowers.

InstaLinks:

Prelims Link:

1. Digital Lending.
2. Regulations related to Digital Lending.
3. RBI appointed committee.
4. Its recommendations.

Mains Link:

Discuss the concerns associated with digital lending in the country.

Sources: Economic Times.