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Sansad TV: Perspective- RBI: Digital Lending Rules

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Introduction:

Reserve Bank of India has issued detailed guidelines for digital lending according to which digital loans must be credited directly to the bank accounts of borrowers and not through any third party. RBI also said that digital lending entities and not the borrowers should pay fees or charges payable to Lending Service Providers in the credit intermediation process. While issuing these guidelines RBI mentioned concerns primarily related to unbridled engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices.

Digital Lending

  • Financial Stability Board (FSB) has defined FinTech as “technologically enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services”.
  • In the absence of a universally acceptable definition of the term ‘digital lending’, FSB definition of the term ‘FinTech credit’ as all credit activity facilitated by electronic platforms whereby borrowers are matched directly with lenders comes close.
  • This definition has been loosely explained by FSB to include market place lending i.e., lending financed mostly from wholesale sources and non-loan obligations, such as, invoice trading.
  • FSB has also classified ‘peer-to-peer lending’ and ‘loan-based crowdfunding’ as the main components of FinTech credit.
  • One generally accepted feature of digital lending is that it means ‘access of credit intermediation services majorly over digital channel or assisted by digital channel’.

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.

India’s digital lending

New guidelines:

  • All loan disbursals and repayments are to be executed between the bank accounts of the borrower and the entity. This eliminates the presence of a nodal pass-through or pool account of the LSP.
  • Lenders must inform the borrower about all the fees, charges, and the annual percentage rate (APR) in a standardised format.
  • Charges payable to LSPs in the credit intermediation process will be paid directly by the bank and not the borrower.
  • No automatic increase in credit limit can be made without the explicit consent of the borrower.
  • Data collected by digital lending apps must be need-based, with the borrower’s prior consent, and can be audited if required.
  • Banks and the LSPs associated with them must appoint a nodal grievance redressal officer to deal with fintech- or digital lending-related complaints.
  • The borrower can complain to the Integrated Ombudsman Scheme of the RBI if their grievance is not resolved by the bank within 30 days.
  • Regulated Entities are required to ensure that any lending carried out through digital lending apps has to be reported to Credit Information Companies (CICs).
  • Lending through the Buy Now Pay Later (BNPL) mode also needs to be reported to the CICs.

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.

Issues wrt digital lending apps:

  • Growing number of unauthorised digital lending platformsand mobile applications as:
  • 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.

Way Forward:

  • It is an absolute necessity for RBI to oversee data collection and retention by DLAs so that it can safeguard the mass consumer interests against any breach of data, exorbitant interest level, digital lending frauds, etc by a handful of entities.
  • These norms reduce the role of the third party and prevent any misappropriation or misuse of data.
  • The regulatory body comes into play only so to aid in the prudent and sustainable expansion of the digital lending ecosystem while safeguarding consumer interests.