RBI brings law to regulate Digital Lending

Q Why is it in News ?

A A Reserve Bank of India (RBI) Working Group (WG) on digital lending has recommended separate legislation to oversee such lending as well as a nodal agency to vet the Digital Lending Apps.

Q What is Digital Lending ?

A 

• Digital lending is the process of availing credit online.
• Its increased popularity amongst new-age lenders can be attributed to expanding smartphone penetration, credit range flexibility, and speedy online transactions.

Q What is Significance of Digital Lending ?

A India has a huge growth potential when it comes to the Digital Lending landscape:

• Alternate source of finance: Digital lending is mostly preferred by those who are generally not able to avail any credit through the formal sources of finance, like banks.
• Lender of the last resort: Digital lending is mostly preferred by those who are generally not able to avail any credit through the formal sources of finance, like banks.
• Financial inclusion: Digital lending is a powerful tool that can be used for financial inclusion.
• Cost-efficient lending: With new innovations underway, digital lending offers much better products to the masses at a much faster rate which is even more cost-efficient.
• Exception for red-tapism: Online lending has played a pivotal role in evading cumbersome red-tapism usually involved while availing loans offline in a traditional setting.
• Preference by MSMEs: The online lending platforms have gained massive popularity among MSMEs post-Covid as they were unable to secure finance through traditional lending.
• Easy onboarding: The quick turnaround time and onboarding, easy KYC, as well as disbursement within minutes have attracted the cash-crunched MSMEs towards these digital routes to secure credit.

Q What are Issues with Digital Lending ?

A 

• No business model: There are many gaps that are existent in this model of digital lending like any new business operation.
• High interest: Unauthorised lenders provided credit to customers without any collateral and at exorbitant rates coupled with unachievable deadlines to pay off these humongous debts.
• Coercing and harassment for recovery: Resultantly, borrowers were coerced by the lenders to recollect when they were unable to pay off these debts. We see many cases of suicides due to such harassment.

Q What are key recommendations by RBI ?

 A

• Self-Regulation: RBI has mooted a Self-Regulatory Organisation for participants in the digital lending ecosystem.
• Developing a Baseline Technology: Development of certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions.
• Direct loan disbursement: Disbursement of loans directly into the bank accounts of borrowers; disbursement and servicing of loans only through bank accounts of the digital lenders.
• Data collection: With the prior and explicit consent of borrowers with verifiable audit trails.
• Standardized code of conduct: for recovery to be framed by the proposed SRO in consultation with RBI.

Q What can be way forward ?

A 

• There is a growing need for regulation in this space or unauthorized players like pointed out above will keep popping up.
• Stringent provisions must be formulated which can be enforceable legally.
• Regulation must be enforced in this industry soon to ensure consumer trust remains unfettered.