The Indian lending landscape has progressively adopted the digital route more than the final couple of years, and an exponential rise is predicted for the coming years. Several elements have acted as impetus, such as expanding demand for immediate credit, revolutionary lending models, and a conducive regulatory and policy atmosphere. Impetus from the regulatory standpoint has been driven by the underlying policy objectives of economic inclusion and digitisation.
Presently, there are 3 digital-lending models, observed by way of the regulatory-strategy lens: a) bank/NBFC-owned digital platforms operating beneath the direct regulatory purview of RBI, b) fintech companies’ proprietary digital platforms, working in partnership with banks/NBFCs, generally beneath an outsourcing arrangement, to assistance sourcing of borrowers, assessing creditworthiness employing option information, and recovering dues getting mere intermediaries, these platforms are not essential to seek any registration with RBI, and are only indirectly regulated by way of RBI’s outsourcing recommendations applicable to Banks/NBFCs, and c) peer-to-peer (P2P) lending platforms, which ordinarily involve the otherwise unregulated retail lenders. RBI has mandated such platforms to seek registration as NBFC-P2P therefore, they are straight regulated by RBI.
Recently, specific problems plaguing this ecosystem have come to the fore, predominantly in the intermediary-platform model. The distinct problems are unauthorised lenders, exorbitant prices of interest, use of coercive repayment approaches, and non-consensual collection or use of user information. These problems entail significant adverse implications for borrowers and have systemic implications, hampering the rise of genuine fintech players.
With a view to curb such practices, RBI, in 2020, issued a notification to Banks/NBFCs mandating added disclosures/compliances, and an advisory to borrowers warning them against such platforms. Following the notification, Google removed numerous such loan apps from its PlayStore. The Digital Lenders’ Association of India (DLAI) also issued recommendations to assistance borrowers determine such unscrupulous platforms. In the regulatory pipeline on this front is the report of the working group on digital lending, constituted by RBI in January 2021.
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Given the important contribution of genuine fintech players, it is significant to make certain that any policy options to address such problems do not impede the development of such players. The crucial to this lies in adoption of light-touch regulation, along with the powerful implementation of the currently proposed regulatory initiatives. For instance, the main lead to of the increasing provide of unauthorised lending platforms is the current credit info asymmetry that genuine lenders face in respect of compact borrowers. Here, operationalising and on-scale implementation of RBI’s proposed ‘Public Credit Registry’ (an substantial credit info database accessible to all stakeholders) and the ‘Open Credit Enablement Network’ (an infrastructure protocol enabling digital low price lending to compact borrowers by way of access of consented information) would lead to elevated participation of genuine players and curb proliferation of unauthorised lenders.
Another foundation for framing powerful policy options lies in leveraging the interdependence and influence of every person constituent of the digital lending ecosystem, on other constituents. Apart from lenders/platforms/borrowers, these constituents also incorporate the digital lending business associations (such as DLAI or Fintech Association for Consumer Empowerment), consent managers and technologies developers. Regulators and business associations working with each other can provide the vital foundations for addressing these problems. For instance, on the problem of unauthorised lenders, in conjunction with RBI’s warnings and public notices, a ‘financial awareness campaign’ with regulators and business associations collaborating, would assistance constrain the demand for this unauthorised economy. Other options spear-headed by business associations could be to establish ‘certification system’ based upkeep of a repository of lending platforms for straightforward identification of genuine players. While business associations have voluntarily currently began lots of such initiatives, granting formal recognition to such initiatives would provide strength and impetus.
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Similarly, on the information protection aspect, a structural answer by way of coordinated efforts of several digital lending constituents is essential. A lot is currently underway and on initial trajectory in Indian regulatory context. The central driver of this is the final layer in India-stack, i.e., information empowerment and protection architecture, which empowers persons to securely access and share their information with third parties, mediated by way of consent managers recognized as Account Aggregators (AAs). AAs are themselves ‘data blind’ and serve as a conduit for encrypted information flows. Just as the UPI transformed India’s digital payments, it is anticipated that with the active participation of all stakeholders, the AA model, with its low-price, consent-based information flow, will transform digital lending. The enactment of a information protection law, would also, definitely bring the significantly-required statutory protection.
To conclude, for the continued improvement of the Indian digital lending economy, it is significant to implement policy options that adequately safeguard the borrowers from malpractices, though, at the similar time, do not dampen innovation in this rapid-evolving sector.