RBI report on digital lending: The path ahead for digital lending

RBI report on digital lending: The path ahead for digital lending
© Provided by The Financial Express These include overleveraging of customers, usurious rates, collection methods not in line with regulatory prescriptions, regulatory arbitrage, etc.

By Sameer Shetty

Last month, RBI’s working group on digital lending released a set of recommendations and suggestions that lay down principles for regulation of the digital financial services sector. The digital lending space has grown 12X between FY17 and FY20, as per RBI data. A slew of digital lending apps that have emerged are not regulated by RBI. They typically partner with banks or NBFCs to offer loans, but in some cases, offer it through their own balance sheets. Today, consumers can get a loan on almost any app that they use-e-commerce, food delivery, cab aggregators, etc. Further, the loans are available instantly, on three clicks. While the ubiquitous availability and ease of availing the loans have dramatically increased penetration of these loans, they pose several challenges. These include overleveraging of customers, usurious rates, collection methods not in line with regulatory prescriptions, regulatory arbitrage, etc.

The working group’s report addresses these and other issues in a holistic manner and establishes a framework for growth of the sector. While there is a large list of recommendations and many nuances, eight areas stand out:

First, the report creates a clear distinction between Balance Sheet Lenders (BSLs) and Loan Service Providers (LSPs). BSLs are entities that can give out loans and take credit risk; only regulated entities can be BSLs. LSPs may be digital apps or other ecosystem players, who offer borrowing options to customers. LSPs need not be regulated entities, but they cannot lend on their own and need to necessarily partner with regulated entities. LSPs manage the customer front-end and experience, BSLs book the loans and manage risk and regulatory compliance. This segregation of roles allows the industry to innovate and evolve and at the same time ensure regulatory compliance and oversight.

Second, the report recommends against allowing backdoor entry into regulated activities, via a ban on the First Loss Default Guarantee (FLDG) instrument, which allowed unregulated entities to take credit risk and offer loans to customers. Equally important, it holds that credit risk taking can only be allowed with regulated entities. This will pose existential challenges for a number of new age lenders, whose business models were built on shadow lending. In addition to FLDGs, the report calls for checks on lend-a-balance-sheet models, and also asks to set clear direction via regulations for neo-banking and decentralised finance(DeFi) models as well.

Third, the report calls for eliminating regulatory arbitrage. The key recommendation here is that all products with credit risk involved are recognised as lending products. As an example, many Buy Now Pay Later (BNPL) providers do not treat BNPL as a loan. As a result, they do not follow KYC procedures while onboarding customers, do not check with the credit bureau and do not report to the bureau. The report calls for such products to be identified as lending products and following necessary checks.

Fourth, the report calls for several actions to be taken to ensure consumer protection. The report asks institutions to include all interest and charges paid as Annual Percentage Rate (APR), which needs to be communicated to the customer transparently. Currently, lending rates and charges on digital apps can cumulatively add to over 100% in some cases. Rates of 40-45% are quite normal. A large portion of this is charged as fees, which makes the interest rate look more palatable. The report recommends that Short Term Consumer Credit (STCC) be brought under appropriate guidelines similar to that of governing MFIs, to prevent usurious rates. In fact, for certain categories of very short term and non-instalment loans, the report suggests that RBI should restrict such products. There are other recommendations on reducing over-indebtedness, restricting refinancing etc, all of which will significantly add to consumer protection.

Fifth, the fair treatment of borrowers takes centre-stage. The working group has recommended that the regulated entity associated with the LSP should ensure that the LSP follows a set of criteria that ensure fair treatment of borrowers, particularly around practices in collections. Given the instances of coercive behaviour shown in collections by digital apps, this will come as a confidence booster to customers and the ecosystem.

Sixth, the working group has laid out some fundamental principles around data and data privacy. The broad approach is to identify the consumer as the owner of the data, and not the entity. One of the areas identified is the need to get explicit consent from customers before using their data for making lending decisions. So, if you bought something on your favourite e-commerce platform, the platform will need to take your explicit consent before using this data to make an underwriting decision. Similarly, today unregulated entities can get access to customers’ credit bureau information by asking them to check their scores via their apps. The report makes it clear that such access can only be provided to regulated entities. It also lays out the need to create rules on what data can be used for which purpose and for what time duration. These recommendations will help enhance overall security of data and consumer trust.

Seventh, the report calls for the creation of a Self-Regulatory Organisation (SRO) to frame standards and govern activities in the space. It also recommends creating the Digital Trust of India Agency (DIGITA), which will inter alia set up the minimum technical standards and verify compliance. Apps not carrying a verified signature by DIGITA will be considered non-compliant from a law enforcement perspective. The report also calls for a law banning unregulated lending activities. There is a recommendation for RBI to introduce an Agency Financial Service Regulation (AFSR) that will set a framework for all customer-facing and fully outsourced activities of regulated entities. These formal mechanisms will give teeth to the intent of the report.

Last, the report highlights few areas that need to be further looked into from a regulatory perspective. One such area is the role of Big Tech in financial services and the risk, regulatory and compliance challenge that it brings. Overall, the report takes a balanced view of this sector, while calling for specific regulatory interventions to reduce concentration risk and eliminate regulatory arbitrage. It also calls out issues such as unfair competitive advantage through access to data, potential for cross-subsidisation etc. Moreover, the report highlights neo-banking and DeFi. These two areas are witnessing activities similar to digital lending, but do not fall under any specific regulatory framework. Finally and critically, the report also talks about introducing digital-only banks and NBFCs.

In summary, the digital lending report provides a balanced framework encouraging innovation, protecting consumers and minimising risks to the financial system. A framework of this nature is critical for the industry to grow and thrive at scale. There are many nuances that will get debated and clarified over time; however, this report is a seminal one and will likely lay the groundwork for the future of digital financial services in India.

The author is President & head (Digital Business & Transformation), Axis Bank. Views are personal

News Related

OTHER NEWS

U.S.'s Blinken holds talks with China's Wang on Ukraine situation

(Reuters) – U.S. Secretary of State Antony Blinken spoke on Wednesday to Chinese Foreign Minister Wang Yi in talks on global security and the economic risks that could stem from ... Read more »

Twitter suspends spoiler account for 'Wordle' answer reveal

Twitter suspended a bot account on Wednesday for spoiling the solution to the next day’s Wordle, the wildly popular internet word puzzle. © Stefani Reynolds Web game wordle asks players ... Read more »

Veteran infielder Gordon Beckham announces retirement

© Quinn Harris-USA TODAY Sports Gordon Beckham last played in the big leagues for Detroit in 2019. Former big league second baseman Gordon Beckham announced his retirement this evening on ... Read more »

ISL Transfer News: Redeem Tlang Joins Odisha FC on Loan from FC Goa

© Provided by News18 Indian Super League (ISL) club Odisha FC announced the signing of Redeem Tlang from FC Goa on Wednesday on a season-long loan. Half the ISL season ... Read more »

Report: WR JuJu Smith-Schuster 'hopes' to sign with Chiefs in free agency

© Rich Barnes-USA TODAY Sports Pittsburgh Steelers wide receiver JuJu Smith-Schuster Barnes-USA TODAY Sports After considering an offer from the Chiefs last offseason, wideout JuJu Smith-Schuster will give Kansas City another ... Read more »

Brett Favre believes Aaron Rodgers has played his last snap with Packers

© Provided by Fansided Brett Favre doesn’t think Aaron Rodgers will stick with the Packers, believing the quarterback will move on to play somewhere else. Will Aaron Rodgers play another ... Read more »

Sarah Palin dines outside at Manhattan restaurant after testing positive for COVID-19

Sarah Palin dines out in New York only two days after testing positive for COVID-19. Freedomnews.tv Sarah Palin dined outdoors at a Manhattan restaurant Wednesday evening, two days after the ... Read more »

Siri Redmi Note 11 tiba di Malaysia 10 Februari 2022

Kalau anda sedang cari telefon harga patut, saya sarankan untuk sabar dulu. Xiaomi Malaysia melalaui saluran sosial mereka telah mengumumkan tentang ketibaan siri Redmi Note 11 tak lama lagi. Tarikh ... Read more »

US Fed signals rake hike in March: Key takeaways from Chairman Jerome Powell's presser

© AFP US Fed signals rake hike in March: Key takeaways from Chairman Jerome Powell’s presser In a bid to fight inflation, the US Federal Reserve said in its January ... Read more »

What should investors do with Cipla post Q3 earnings; buy, sell or hold?

© Moneycontrol What should investors do with Cipla post Q3 earnings; buy, sell or hold? Shares of pharmaceutical major Cipla declined nearly 2 percent in the early trade on January ... Read more »

Devin Booker outscores entire Jazz team in first quarter

© Joe Camporeale-USA TODAY Sports Phoenix Suns guard Devin Booker They say there’s no “I” in “team,” but there is one in “Devin.” And Devin Booker was all the Suns ... Read more »

Indian spacetech startup Skyroot has raised over $4 million in a round led by one of Google's earliest backers

© Skyroot Indian spacetech startup Skyroot has raised over $4 million in a round led by one of Google’s earliest backers Indian space startup Skyroot Aerospace has raised $4.5 million ... Read more »

The Hornets, LaMelo, wouldn't stop beating up the Pacers, who were already dead

© Provided by For The Win A cursory glance would’ve told you the Hornets (-2) and Pacers played a regular NBA basketball game in Indianapolis on Wednesday night. Sure, neither ... Read more »

DeRozan powers Bulls to 111-105 win over Raptors

© Provided by Associated Press – Sports Chicago Bulls’ Javonte Green (24) scores past Toronto Raptors’ Pascal Siakam during the second half of an NBA basketball game Wednesday, Jan. 26, ... Read more »

Report: In potential trades, Rockets focused on draft picks in 2023 and beyond

© Provided by RocketsWire The Houston Rockets currently have four first-round picks on their roster from the 2021 NBA draft, two promising second-year players in Jae’Sean Tate and KJ Martin, ... Read more »

Stock Market: Sensex Drops 1,000 Pts, Nifty Below 17,000 as Fed Signals Hike; 10 Points

© Provided by News18 Stock Market: Sensex Drops 1,000 Pts, Nifty Below 17,000 as Fed Signals Hike; 10 Points The key benchmark indices Sensex and Nifty opened in deep red ... Read more »

Budget 2022: 4 key reforms real estate industry expects from govt

© Provided by Business Today Budget 2022: 4 key reforms real estate industry expects from govt The Union Budget 2022 is expected to be one of the most watchful events ... Read more »

Bradley Beal on Wizards' humiliating loss to Clippers: We relaxed

© Scott Taetsch-USA TODAY Sports Washington Wizards guard Bradley Beal The Wizards blew a 35-point lead against the Clippers on Tuesday, suffering a humiliating 116-115 defeat, raising questions about Washington’s direction as ... Read more »

Redmi Note 11, Note 11S And Note 11 Pro Smartphones Launched: Price, Specs And More

Chinese smartphone maker Xiaomi has announced its latest Redmi Note 11 series that includes the Redmi Note 11, Redmi Note 11 Pro, Redmi Note 11 Pro 5G, and the Redmi ... Read more »

How intense partisanship in the U.S. could hurt Ukraine

© Olivier Matthis, Associated Press NATO Secretary-General Jens Stoltenberg, center, greets Finland’s Foreign Minister Pekka Haavisto, left, and Sweden’s Foreign Minister Ann Linde, right, at the end of a media ... Read more »

Hornets score franchise-record 158 points, including 87 in second half

© Trevor Ruszkowski-USA TODAY Sports The Hornets’ offense was on another level Wednesday. An all-time level, really. Charlotte scored 158 points in its win over Indiana, a new franchise record ... Read more »

LeBron James jokes about viral Austin Reaves moment

© Jayne Kamin-Oncea-USA TODAY Sports LeBron James got in on the Austin Reaves meme fun on Wednesday night. James’ Los Angeles Lakers beat the Brooklyn Nets 106-96 on Tuesday night, ... Read more »

Janet Jackson denies having baby with James DeBarge in the '80s

© Provided by Cover Media Janet Jackson Janet Jackson has rejected a long-standing rumour that she had a baby in the 1980s. For many years, people have speculated that the ... Read more »

Anxiety and anger grip press corps in Mexico after spate of murders

A version of this article first appeared in the “Reliable Sources” newsletter. You can sign up for free right here. © Cesar Gomez/SOPA Images/LightRocket/Getty Images QUERETARO, MEXICO – 2022/01/25: Protesters ... Read more »

Where to Find and Collect Concert Coins in Fortnite

© Provided by Dot Esports Over the last couple of years, concerts have become a core part of Fortnite. With the Soundwave Series’ latest return, Fortnite players were invited to a concert for ... Read more »

NBA champion headlines Celebrity Big Brother Cast

By John Powell – GlobalTV.com © Provided by Global TV Two-time NBA champion Lamar Odom will be battling it out with 10 other Celebrity Big Brother houseguests for the $250,000 ... Read more »

Uttarakhand polls: Congress to not field Harak Singh Rawat to fight elections, say sources

Uttarakhand polls: Congress to not field Harak Singh Rawat to fight elections, say sources The Congress has decided not to field Harak Singh Rawat to contest the Uttarakhand Assembly Election, ... Read more »

BREAKING: Uttar Pradesh schools shut till February 15 amid surge in Covid-19 cases, online classes to continue

© Provided by Zee News Lucknow: The Uttar Pradesh government has decided to close schools across the state till February 15 in view of increasing Covid-19 cases. However, online classes ... Read more »

Raymond stock jumps 4% on robust Q3 performance

NEW DELHI – Shares of Raymond climbed 4.4 per cent in early trade on Thursday as the textile major reported a multifold jump in its net profit at Rs 101.07 ... Read more »

Indiabulls Real Estate plunges 8.6% after reporting Rs 87.21 cr net loss in Q3

NEW DELHI – Shares of Indiabulls Real Estate plummeted 8.6 per cent in early trade on Thursday as the company reported a consolidated net loss of Rs 87.21 crore for ... Read more »

Cipla gains despite YoY fall in Q3 profit as bottom-line surpasses estimates

NEW DELHI – Shares of Cipla climbed 2 per cent in early trade Thursday despite the drug major reporting a 2.6 per cent decline in third-quarter profits as investors cheered ... Read more »

SRF slips over 4% as rise in Q3 net profit fails to cheer investors

NEW DELHI – Shares of SRF declined along with benchmark indices on Thursday, with the stock shedding around 4.5 per cent in early trade as a 56 per cent increase ... Read more »

Tata to offer ‘enhanced' meals on flights as first move in Air India takeover

© Provided by Hindustan Times The Centre aims to complete the Air India disinvestment process to the Tata Group on January 27. (Reuters/Representative) As a first step in the process ... Read more »

Delhi's air quality in 'poor' category; temperature likely to dip to 5 degrees

In Delhi, the air quality stood in the ‘poor’ category on Thursday morning. The Air Quality Index (AQI) was at 263 at 7 am, as per the Central Pollution Control ... Read more »

'Will Not Follow World Blindly': India May Not Expand Precautionary Covid Vaccine Doses for All Ages

© Provided by News18 ‘Will Not Follow World Blindly’: India May Not Expand Precautionary Covid Vaccine Doses for All Ages After a high-level meeting with the WHO on the issue ... Read more »

Suspected Naxals blow up portion of railway tracks on Howrah-New Delhi line in Jharkhand

© Provided by Jagran English Ranchi | Jagran News Desk: In a gruesome incident that could claim many lives, suspected Naxalites on Thursday blew up a portion of railway tracks ... Read more »

Covid-19: India logs 2,86,384 new cases in last 24 hours; positivity rate rises to nearly 20%

© Provided by Hindustan Times A health worker collects a swab sample from a person for coronavirus (Covid-19) test, at Jangpura in New Delhi. (Amal KS/HT Photo) India reported 2,86,384 ... Read more »

Vikings hire former Wall Street trader Kwesi Adofo-Mensah as GM

MINNEAPOLIS — The Minnesota Vikings have hired Kwesi Adofo-Mensah as their general manager, taking an innovative turn with an Ivy League-educated data expert from Cleveland’s front office who once worked ... Read more »

Ind vs WI: Shahrukh Khan, Rishi Dhawan to Devdutt Padikkal; Players Who Could Have Been Picked in India Squad

© Ankit Banerjee | India.com Sports Desk Ind vs WI – Players Who Could Have Been Picked Mumbai: The Board of Control of Cricket in India (BCCI) on Wednesday night ... Read more »

Billy Crawford recalls the first time Amari called him "daddy"

© Provided by PEP.ph Like any working parent, Billy Crawford fears that he is not spending enough time with Amari, his one-year-old son with wife Coleen Garcia. That’s why hearing ... Read more »
On free-english-test.com you will find lots of free English exam practice materials to help you improve your English skills: grammar, listening, reading, writing, ielts, toeic