Figure 1: No Copyright Infringement Intended

Context:

• A Reserve Bank of India (RBI) Working Group (WG) on digital lending, including lending through online platforms and mobile apps, has recommended a separate legislation to oversee such lending as well as a nodal agency to vet the Digital Lending Apps.

Further Details:

• It has also mooted a Self-Regulatory Organisation for participants in the digital lending ecosystem.
• It has proposed development of certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions.
• It has also suggested that disbursement of loans be made directly into the bank accounts of borrowers and servicing of loans be done only through the bank accounts of the digital lenders.
• All data collection must require the prior consent of borrowers and come ‘with verifiable audit trails’ and the data itself ought to be stored locally.
• The report’s thrust has been on enhancing customer protection and making the digital lending ecosystem safe and sound while encouraging innovation.

Key Proposals by the Committee:

• Digital lending apps should be subjected to a verification process by a nodal agency to be set up in consultation with stakeholders
• The working group proposed the setting up of a Self-Regulatory Organisation (SRO) covering the participants in the digital lending ecosystem
• Disbursement of loans should be directly into bank accounts of borrowers
• Maintenance of a ‘negative list’ of lending service providers by the proposed SRO

About Digital lending:

• 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.
• Transactions are happening over the internet being replaced by fintech’s credit-based payment products, such as Buy Now Pay Later (BNPL) or Convert to EMI Products.
• These companies utilize their customer’s financial and transactional data to underwrite digital loans over an API-driven approach, thereby substantially lowering the time required to gain personal or payday loans.

Data on Digital lending:

• The RBI says lending through digital mode relative to physical mode is still at a nascent stage in the case of banks (Rs 1.12 lakh crore via digital mode against Rs 53.08 lakh crore through the physical mode) .

Role of Digital Lending:

• Financial Inclusion: Digital lending is a powerful tool that can be used for financial inclusion. With new innovations underway, digital lending has enabled many Financial Service Providers a way to offer much better products to the masses at a much faster rate which is even more cost-efficient.
• Quality of Financial Services: Digital lending can prove to be a tool acting towards the growth of higher quality of financial services to underserved businesses and people.
• Credit to MSME: Digital lending is mostly preferred by those who are generally not able to avail any credit through the formal sources of finance, like banks. The online lending platforms have gained massive popularity among MSMEs post Covid as they were unable to secure finance through the traditional lending institutions and thus had to go towards digital lending.
• Ease for Credit:  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.

Associated Challenges:

• digital lending ecosystem is still evolving and presents a patchy picture.
• 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:

• The Committee proposal must be incorporated and made into separate law.