Reserve Bank of India constituted a working group on digital lending on January 13, 2021 to study digital lending activities undertaken by both regulated financial sector and unregulated players to develop a regulatory approach for easy working. Its report running 151 pages is now available. It has 5 sections with the following broad contour.
Section 1: Constitution of the group, processes followed, foreground etc.
Section 2: Digital lending landscape – digital lending meaning, its eco – system, global/Indian scene.
Section 3: Regulatory policy approach to digital lending, extant Indian legal regimes, global regulatory practices, case for regulatory/supervisory review, recommendations in this regard.
Section 4.: Technology standards of digital lending, life cycle of digital lending, regulatory perspectives, suitable recommendations.
Section 5: Financial consumer protection, frameworks available in India, global practices, conduct aspects of digital lending, recommendations of the committee.
Anyone interested to refer to the main report gets the reference at the end. This whole write-up is based on this working group report only.
With broad contour in detailed explanations, let us learn the report for clear understanding.
Why was the committee constituted?
Digital lending in regulated bodies, less emphasized, along with its wide reach through unregulated bodies (both webs based and even cell based) at an alarming scale prompted RBI to constitute a six -member committee with the following “terms of reference”.
Before we proceed with our detailed analysis or deeper understanding of the issues involved with digital lending with its complex subjects involved, why not clarify some terms widely used so far? (Yes, from main report only)
1. Balance Sheet Lenders: Lenders who undertake balance sheet lending. Yes, scheduled commercial banks, recognized NBFCs, mostly big ones etc.
2. Consumer Protection Risk: Derived from the definition of misconduct risk, consumer protection risk is the risk that the behavior of a financial services entity, throughout the product life cycle, will cause undesired effects and impacts on customers. How does the entity using my information for sanctioning of digital loans protect me?
3. Cyber Security: Protecting information, equipment, devices, computer, computer resource, communication device and information stored therein from unauthorized access, use, disclosure, disruption, modification, or destruction.
4. Digital Lending: A remote and automated lending process, majorly by use of seamless digital technologies in customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service.
5. Digital Lending Apps: Mobile and web-based applications with user interface that facilitate borrowing by a financial consumer from a digital lender.
6. Regulated Entity: Entities regulated by Reserve Bank of India.
7. Lending Service Provider: Lending Service Provider is an agent of a balance sheet lender who carries out one or more of lender’s functions in customer acquisition, underwriting support, pricing support, disbursement, servicing, monitoring, collection, liquidation of specific loan or loan portfolio for compensation from the balance sheet lender. Most of these entities falling under this category are non- recognized entities and hence not regulated by RBI or others and cause maximum digital loans to emanate from them.
With ballooning of credit from non- regulated entities, the committee had no option other than studying the current scene of digital lending in India. Let us soak ourselves with the information on current scene of digital lending in India.
Expectedly, banks with their wallets or other debit/credit cards have not matched up to the credit by non-regulated entities.
NBFCs have lent, higher proportion of lending (₹0.23 lakh crore via digital mode vis-à-vis ₹1.93 lakh crore via physical mode) as on March 31, 2020.
What about banks with their most dislike way of lending through digital means?
Let us look at their performance.
Why not look at some figures of performance from page 25-26 of RBI report.
I shall be quoting the figures of digital lending from banks, NBFCs etc.
Overall volume of disbursement through digital mode for the sampled entities has exhibited a growth of more than twelvefold between 2017 and 2020 (from ₹11,671 crore to ₹1,41,821 crore).
Private sector banks and NBFCs with 55 per cent and 30 per cent share respectively are the dominant entities in digital lending ecosystem. Also, share of NBFCs has increased from 6.3 per cent in 2017 to 30.3 per cent in 2020 indicating their increasing adoption of technological innovations.
As on March 31, 2020), it was noted that lending through digital mode relative to physical mode was still at a nascent stage in case of banks (₹1.12 lakh crore via digital mode vis-à-vis ₹53.08 lakh crore via physical mode). Most of the banks show least inclination towards increasing digital loans.
To lend more credibility to our discussion, can we have the product mix for comparison purposes?
Let us deal with regulatory policy approach towards digital lending. The RBI group dealt extensively towards the FinTech which deals new data, algorithm, software applications to perform traditional financial service provisions without significant change in the underlying functions – popularly known as incrementalistic Fin tech.
I can easily recollect the popular laws like Banking Regulations Act 1949, Reserve Bank of India Act, 1934, Companies Act 2013, State Money Lenders Act, and Chit Funds Act, 1982. Other regulations or instructions of relevant authorities do play their roles in affecting digital lending practices.
Pages 34 and 35 deal with the Global Regulatory Practices. A comparative study of global regulatory practices about ‘FinTech platform financing’ undertaken by Bank for International Settlements (BIS) in its publication released in August, 20201 mentioned FinTech platform financing as under:
(i) FinTech balance sheet lending.
Most jurisdictions do not have any specific regulatory framework for FinTech balance sheet lending, and it is governed by regulations applicable to other non-bank lending institutions which are briefly explained below.
What should be done to regulate digital lending for all types of entities?
The committee’s report has dwelt on this both for short term as well as medium term with specific recommendations, and also gave advice to RBI or others by the way of recommendations. (Kindly refer pages 43-51 for recommendations addressed to Government of India/RBI)
The approach adopted by the committee should be the beacon holder for deeper understanding.
“The approach adopted in this Report is guided by the following three principles:
So, for you to understand, encouraging competition among all business models, not rule based but principle based, and regulatory measures with equality among all entities are the enshrined principles.
But what are the recommendations?
a) Legal & Regulatory Recommendations Near Term (up to one year)
b) A nodal agency to verify the technological credentials of DLAs of the balance sheet lenders and LSPs operating in the digital lending ecosystem.
c) Balance sheet lending through DLAs to be restricted to entities regulated and authorized by RBI.
d) An SRO (self- regulatory organization) to be constituted covering the participants in the digital lending ecosystem.
e) All loan servicing, repayments, to be executed directly in a bank account of the balance sheet lender and disbursements should always be made into the bank account of the borrower.
f) However, borrowers having only PPI account and no bank account would avail PPI accounts which are fully KYC compliant.
Now about medium- term implementations (above one year)
Now to talk about technology regulation
Short term measures
Medium term measures
Now to deal with consumer protection.
An anti-predatory lending policy should be framed by each lender based on the characteristics to be defined by RBI/ proposed SRO.
Yes, technology would crowd pull customers in unheard of measures since the current banking/regulatory/big financial institutions live in past, prescribe regulatory measures totally devoid of practical utility, and in a way encourage mediocrity.
It is firmly believed by REs that security is a must for business like existence. Do you believe that several cell calls impede me with personal loans by private sector banks/unregulated agencies even during the writing of this article?
Being banking literate, I fear misuse of personal data, improper storage by my bank, a very big- nationalized bank with unbridled regulation by authorities, and more harm than temporary gains.
Yes, my personal avoidance of modern technology for getting finance or utilization of funds may not hold good for ever. Latest unregulated entities offer fastest investment options, immediate gain in wealth, and more prosperity in near/medium term.
I expect the committee of RBI filled with older members to be more open with the realities of modern India.
Yes, report invites suggestions from you before implementation. I shall write my own but what about you?
In general terms, faster loans, timely ones, but with secured storage of my data, well preserved in India, audited periodically, and available for easy growth to meet future still uncertain but sure towards prosperity.
(The above web site contains 12 of its recommendations, though I have dealt with the report in a holistic and homogenous manner)
Please send your recommendations to [email protected] by 31 December 2021. Yes, please do act.
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