- KRISHI SHAH
The financial sector appears to be at its peak as India embraces the digital era, with money transfers becoming as simple as phone calls. The country has adapted to the digital world rather fast. More than 50% of the population has adapted itself to Digital Lending. In 2022, India's markets began to recover, which was attributed to a surge in capital flow in the market as a result of people being able to borrow money more freely. The tedious method of filing paperwork to have a loan authorized is no longer adhered to. Over the past year, numerous Non-Banking Finance Companies (NBFCs) have begun operations. These Companies have stagnated the growth the lending by Private Sector Banks. One of the fastest-growing fintech industries in India is digital lending, which increased dramatically from nine billion dollars in 2012 to approximately 150 billion dollars in 2020. By 2023, it was anticipated that the market for digital loans would be worth about 350 billion dollars. However, with the convenience of accessibility and comfort of borrowing easily comes the dangers of fraud, unreported charges, exorbitant interest rates, risk of identity theft and harsh collection tactics. As the Reserve Bank of India (RBI) recently legitimised digital banking, it also released guidelines to regulate all the possible risks and dangers to safeguard the interests of the people.
To start with the basics digital lending according to RBI[1] is “technologically enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services”, also known as FinTech. Fintech includes Paytm, Google Pay, Phone Pay and like other thousands of apps that are created every day. As of 2020, there are 1100 Indian loan apps out of which 600 are illegal. To prevent the rise in fraud and regulate the fintech market the guidelines have become stricter. According to the new rules, regulated entities such as banks (or NBFCS established under RBI) must ensure that loan servicing and repayments are executed directly in their bank account without any third party’s pass-through or pool account. These third-party apps (Digital Lending Platforms) don’t directly give you money, they give it through the bank. These guidelines have tried to reduce the role of the DLPs and enhanced the role of NBFCs.[2] Hence money goes straight from one bank account to another bank account in either the case or borrowing or returning the principal. If there are any charges regarding transfers the banks and NBFCs directly need to obtain it from the borrower or lender. The Digital Lending Platform can have no role in that. Before the loan contract is signed, the borrower must get a standard "key fact statement" outlining all of the charges associated with the loan. This guideline pushes for greater transparency for both parties.
A new concept called a cooling off period has been introduced where NBFCs will have to provide a time window to the borrowers for exiting the digital loan without a penalty, in case the borrower decides not to move forward with the loan. In addition to this, all regulated entities must ensure all DLPs engaged by them have a nodal grievance redressal officer to deal with digital lending-related problems.
Another crucial rule is the prohibition on automated increases in credit limits without the borrower's express consent. The Press Release adds a layer of complexity and compliance over and above the existing framework provided by the Information Technology Act, 2000 making it a lot more stringent. All data must be stored on servers in India by the Regulated Entities. All personal data collected by these digital lending platforms also cannot be used without the borrower’s explicit consent. Article 21's right to life and liberty[3], which implicitly includes the right to privacy, is reinforced by this provision. The RBI has suggested to the government to ban unregulated lending activities and set up an independent body to be the watchdog of all the DLPs. It has also recommended the setting up of a financial crime bureau targeting financial crimes.
While the guidelines have just emerged, the effects are already being felt. Customers now cannot pool multiple accounts to repay their loans.[4] Typically, the DLP would integrate various digital methods for the convenience of the customer. However, now all fund flows must be directly made between the customer and the lender. Retail customers have suffered since without payment aggregators, the process and user experience for making loan repayments could become more complex. Consumers who have accessed loans for particular purposes have been negatively impacted by restrictions on the issuance of loans using e-wallets in an effort to promote transparency.
The guidelines have also made traditional lenders sceptical of fintech companies. NSBCs and Bank first had a contractual agreement with fintech companies to compensate the lenders for customer defaults in their loan portfolios as well as providing collateral to the lenders. The RBI believes this safety net could have a domino effect on the whole ecosystem hence this practice has been restricted. The above provisions have made the lenders more cautious, leading to a decrease in credit in the market.
It appears that RBI is revising its policies to meet the requirements of the Indian market. It has developed a strategy that promotes digital development while staying within the bounds of safe banking. It is attempting to find a strategy that strikes a balance between the two global strategies. The first model broadens the scope of the current banking laws and rules to include innovators in digital banking.[5] The creation of additional regulatory frameworks tailored expressly for online banking is the second model. The RBI is taking its time to determine which model would be effective in India. None of the regulations has had a significantly negative impact on online lending. With new platforms surfacing daily and the majority of the people adopting digital technology, fintech companies continue to have a promising future in India.
References: [1] https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1189#S21 [2]https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=12382&Mode=0#:~:text=Digital%20Lending%3A%20A%20remote%20and,recovery%2C%20and%20associated%20customer%20service. [3] Indian Constitution, Art 21. [4] https://www.livemint.com/economy/rbi-tightens-rules-for-digital-lending-11660155539823.html [5] https://www.financialexpress.com/money/how-digital-lending-took-off-in-2022-and-its-future-scenario-in-2023/2923882/