What is Digital Lending and why is RBI concerned?

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Recently, the Reserve Bank of India (RBI) cautioned individuals and small businesses against falling prey to the growing number of unauthorised digital lending platforms and mobile applications on promises of getting loans in quick and hassle-free manner.

Digital Lending consists of lending through web platforms or mobile apps, by taking advantage of technology for authentication and credit assessment. 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. Banks have also launched their own independent digital lending platforms to tap in the digital lending market by leveraging existing capabilities in traditional lending.

The advisory comes after  three borrowers in Telangana committing suicide in the recent past, following alleged harassment by personnel of such lenders, and many more complaining of being subjected to coercive methods after defaulting on repayments.

Another incident that triggered this was when 19 people were arrested from Hyderabad and Gurgaon in connection with nation-wide money lending app scam. The tap-and-get-a-loan “solution” has pushed a large number of people into a trap far deeper than the financial condition they are in.

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.
  • Indians continue to borrow from family and friends, and moneylenders, sometimes at unreasonably high interest rates, primarily because these loans are more flexible and convenient.
  • It is time Saving as decreases time spent on working loan applications in-branch. Digital lending platforms have also been known to cut overhead costs by 30-50%.

There are various issues with Digital Lending Platforms as number of unauthorised digital lending platforms and mobile applications are increasing giving birth to the primary concern of security.  They also charge excessive rates of interest and additional hidden charges. They are known to adopt unacceptable and high-handed recovery methods. They misuse agreements to access data on mobile phones of borrowers.

Steps Taken by RBI are as follows-

  • 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.

The central bank urged consumers not to share copies of KYC  documents with unidentified persons and unverified apps. It also asked people to report such apps or bank account information associated with the apps to concerned law enforcement  agencies.

India is on the verge of a digital lending revolution and the government is making sure that this lending is done responsibly and fruits of this revolution are realized. Government of India has taken many initiatives such as Unified Payments Interface, Jan Dhan Yojana, Aadhaar enabled Payment System, etc. to promote digital environment in the country especially after demonetization. Now as the digital payments apps are taking over the market, it is essential to monitor their actions. Hence, the companies should proactively mandate ethical behaviour and norms.