Digital Lending Regulations: Call for Responsible Innovation

By Vijay Dhingra, CLCO, Home Credit India

Regulation or over-regulation stifles innovation – the popular discourse of any industry or stakeholder who is pro-innovation. However, in the digital heavy new normal, the rise of digital lending or fintech and its practices have prompted the government and RBI through its recent digital lending guidelines to set the record straight, although innovations are certainly welcome in this space, they cannot thrive or be allowed to operate at the cost of an unregulated environment as this can stifle the ecosystem, compromise compliance/disclosure and most importantly the protection of consumer rights.

For robust and holistic economic development, financial inclusion is imperative and has always been one of the main programs of the current government. India has the second largest unbanked population with around 190 million adults still without a bank account, the majority being women. The problem is exacerbated in rural India, home to over 65% of India’s population, where most remain outside the availability of formal credit. The lack of strong technological infrastructure in most parts of the country also presents a challenge for financial inclusion.

This is where Digital Lending has assumed its role of providing technology solutions and a seamless customer experience to deliver financial products over the past 5 years, creating a paradigm shift in how the financial industry operates, especially in loan services. Change was the need of the hour, which led to the birth of many fintech start-ups and the era of digital lending.

The latest Fintech industry report from consultancy Bain & Co. – India Fintech Report 2022, indicates that BNPL apps disbursed credits to over 15 million consumers in FY21, while models Digital lending solutions, including short-term loans offered by BNPL players, have emerged as the preferred mode of consumer credit. According to media reports, the digital lending market is expected to grow from $100 billion in 2019 to over $350 billion in 2023.

However, as there is a natural phenomenon that areas that are not governed by any established regulations, tend to create an overgrowth effect that can cause undue negative impacts on the ecosystem. With the advent of countless mobile lending apps, entities other than banks and financial institutions recognized RBI, began to foray into the lending space, and gradually things seemed to be spiraling out of control – starting by the flood of consumer complaints about exorbitant fees. , lack of transparency, harassment during collections, privacy and data security breaches and amplified the credit-hungry behavior of new-age customers. As a result, the substantial efforts made by RBI and the entities regulated by it over the years to operate in a regulated environment have been compromised.

All of this not only caught the attention of RBI, but also led to the intervention of the judiciary and the Indian government. This resulted in the establishment of a task force by the RBI to understand and review prevailing digital lending practices. The study revealed the existence of over 1100 illegal digital lending apps and further the understanding that fintech companies are merely intermediaries or direct selling associates (DSAs) leveraging the balance sheets of banks or NBFCs to the back. Also, as an extension of this, RBI has developed guidelines stating that regulated entities are the true lenders who should interact directly with borrowers instead of fintech platforms which are mere intermediaries. Through this, RBI confirmed the empowerment of regulated entities and gave much-needed recognition to the concept of digital lending and its acceptability under acceptable regulations.

It is also likely to eliminate entities, operating in a completely unregulated environment, which could have caused irreparable damage to the financial ecosystem. The regulations are intended to be a win-win situation for financial entities as well as technology entities to harness respective skills and innovation in a collaborative manner while securing the financial ecosystem, protecting the interests of customers, seamless customer experience, mass reach, data security and last but not least, cost optimization.

Some checks and balances

Indeed, the growth of fintechs and digital means of doing banking, as the RBI rightly pointed out, cannot be completely unregulated. The RBI has issued some key guidelines such as the requirement for loan disbursing apps and credit aggregators to correctly display a link to the partner bank or non-bank financial company (NBFC). The RBI has also recently spoken of a “green light (whitelist) and due diligence process” for fintech and new-age financial firms.

Overall, while a reasonable level of checks and balances are required for digital lending and fintech, regulators should also consider that the guidelines support the growth of modern banking players in a way that allow these entities to operate within this framework. a new regulatory environment with optimized costs, improved customer experience, extended reach, thus supporting the Indian government’s financial inclusion initiative. However, it is equally important that innovations are evaluated to ensure that the eventual outcome of such an innovation does not disrupt the existing ecosystem and aims to make things better.

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