DIGITAL LENDING - ECONOMY
News:
RBI’s modified digital lending norms to come in effect from December 1
What's in the news?
● The
Reserve Bank’s modified guidelines on digital lending that seek to protect
customers from exorbitant interest rates by certain entities and also check
unethical loan recovery practices will come into effect from December 1.
Key takeaways:
1. RBI Working group on Digital Lending:
● The
RBI had constituted a Working Group on 'digital lending including lending
through online platforms and mobile applications' (WGDL) on January 13, 2021.
● Issuing
a detailed set of guidelines for digital lending, the RBI mentioned the
concerns primarily related to unbridled
engagement of third parties, mis-selling, breach of data privacy, unfair
business conduct, charging of exorbitant interest rates, and unethical recovery
practices.
● The
Reserve Bank’s regulatory framework is focused on the digital lending ecosystem
of RBI’s Regulated Entities (REs) and
Lending Service Providers (LSPs) engaged by them to extend various
permissible credit facilitation services.
2. No intermediary:
● Under
the new norms, all loan disbursals and repayments are required to be executed only between the bank accounts of
the borrower and the regulated entities (like banks and NBFCs) without any
pass-through/ pool account of the Lending Service Providers (LSPs).
3. Consent of the borrower:
● Under
the new norms, an automatic increase in credit limit without explicit consent
of the borrower is prohibited.
4. Grievance Redressal:
● RBI-regulated
entities will have to ensure that they and the LSPs engaged by them have a
suitable nodal grievance redressal officer to deal with FinTech/ digital
lending-related complaints.
5. Digital Lending Apps:
● Digital
Lending Apps (DLAs) refer to mobile and
web-based applications with user interfaces that facilitate borrowing by a
borrower from a digital lender.
● DLAs
will include apps of REs as well as operated by LSPs which are engaged by REs
for extension of any credit facilitation services.
What is meant by digital lending?
● Digital
Lending refers to lending through web
platforms or mobile apps by use of technology.
● It
utilizes automated technologies and algorithms for customer acquisition, credit
evaluation, decision making, authentication, disbursements and recovery.
● Lending
Service Providers (LSPs) act in partnership with Non-Banking Financial
Companies (NBFCs) who disburse credit (or a line of credit) to the customer
using the former’s platform, making it a multi-sided platform.
Current Status:
● Digital
lending is one of the fastest growing
fintech segments in India. It has grown exponentially from a volume of US$
9 billion in 2012 to nearly US$ 110 billion in 2019. It is further expected
that the digital lending market would reach a value of around US$ 350 billion by 2023.
● This
business is mainly covered by fintech
startups, neo-banks and Non-Banking Finance Companies (NBFCs).
● Its
customers particularly include small
borrowers without a documented credit history and thus, not served by
traditional financial institutions. Their product mix primarily imbibes
short-term loans, especially those which have shorter tenures of less than 30
days.
● Commercial
banks are also fast joining the genre of financial intermediaries either
lending digitally on their own or joining with NBFCs to share the synergies.
Causes for growing popularity for digital lending in India:
● Rapid advancements in
cloud computing, artificial intelligence, and blockchain,
as well as faster and more affordable internet connectivity, have fuelled the
rise of FinTech start-ups, and lending has also transformed and become
“digital.”
● Synergy
of the robust customer base created by banks in the last ten years, more
importantly after the launch of Pradhan
Mantri Jan Dhan Yojana (PMJDY) scheme in August 2015 is now available to
lenders.
● The
sector presents a huge opportunity which is attracting a lot of investment towards it. The digital
lending platforms have witnessed a compound annual growth rate of 19.6% over
the previous 7 years.
● The
rapid digitization of the economy and
services has been a key driver in financial inclusion and digital lending.
Key benefits of digital lending:
1. Easier loan disbursement:
● The
digital lending platforms have minimized
the geographical barriers allowing borrowers to quickly take up loan
applications.
● They
come with easy data entry, personalized user experience, and smooth loan
application procedures.
2. Less Errors:
● With
digital lending, the chances of human errors are minimal as it is easier to
capture an applicant’s details.
● The
validity of documents can be scanned digitally making the process quicker and error-free.
3. Increases efficiency:
● A
digital lending platform can cut down overheads by half and increase efficiency
at the same time.
● Digital
lending saves time, boosts revenue,
growth and improves lender borrower relationships.
4. Better customer experience:
● Digital
lending has a quick turnaround time, is transparent,
and relieves applicants from the long waiting period for a credit decision.
● For
banks, it also reduces the cost of managing loans, and reduces time spent on
underwriting loans.
● Banks
can process more loans and products and offer a better experience to borrowers
with quick loan approval and funds.
5. Financial Inclusion:
● It
helps in meeting the huge unmet credit need, particularly in the
microenterprise and low-income consumer segment in India.
6. Reduce Borrowing from informal channels:
● It
helps in reducing informal borrowings as it simplifies the process of
borrowing.
7. Time Saving:
● It
decreases time spent on working loan applications in-branch. Digital lending
platforms have also been known to cut
overhead costs by 30-50%.
Concerns:
● Charging exorbitant
interest rates.
● Pursuing
aggressive and unethical recovery
practices and resultant tragic suicides.
● Data privacy issues.
● Committing
fraud through fake applications.
● Unbridled
engagement of third parties.
● Mis-selling
- LSPs often resort to reckless lending practices by endowing credit beyond a
borrower’s repayment capacity.
RBI'S RECOMMENDATION:
The
RBI has divided the digital lenders into 3 groups such as
● Entities regulated by the
RBI and permitted to carry out lending
business.
● Entities authorized to
carry out lending according to other
statutory/regulatory provisions but not regulated by the RBI.
● Entities lending outside
the purview of any statutory/regulatory provision.
● RBI provides guidelines
for the first category i.e., entities regulated by the RBI.
● For other entities under
the second and the third categories, the RBI has asked the respective
regulator/controlling authority/ the Union Government to formulate guidelines.
KEY GUIDELINES BY RBI:
● No intermediaries
- Regulated entities must ensure that loan servicing and repayments are
executed directly in their bank account without any third party’s pass-through
or pool account. The disbursements also need to be made into the borrower’s
bank account.
● Cooling off period
- Regulated entities will also have to provide a cooling-off period during
which the borrowers can exit digital loans by paying the principal and the
proportionate costs without any penalty.
● Grievance Redressal
- Regulated entities must ensure all loan service providers engaged by them
have a nodal grievance redressal officer to deal with digital lending-related
complaints.
● Informed Customer
- Standardized ‘key fact statement’ must be provided to the borrower before the
loan contract is executed.
● Transparency
- All costs pertaining to the loan, including interest rates, fees, origination
charges, discount points, and agency fees - the annual percentage rate (APR) -
must be disclosed to the borrower.
● Consent of the customer
- Automatic increase in credit limit without explicit consent of the borrower
is prohibited.
● Data security
- On technology and data requirements, RBI said lending applications should
collect data on a need basis, with clear audit trails and with the prior
explicit consent of the borrower.
● Regulation
- RBI also recommended that to ensure only authorized and trusted lending apps
are used by consumers, an independent body styled as Digital India Trust Agency
should be set up.
WAY FORWARD:
● This
regulation would also address concerns
emanating from TechFin which are companies that are primarily tech-based
service providers, say e-commerce, and also offer financial services.
● Share:
The share of digital lending may be small at present, but given their
scalability they may potentially become significant players soon.
● With
the economic activity reviving at a
decent pace post pandemic and our expectations of a GDP growth of 7.3% this
fiscal it is expected that demand for loans across the credit ecosystem will be
higher this fiscal despite higher inflation and interest rates.
● The
guidelines are aimed at curbing rising
malpractices in the digital lending ecosystem.