RBI constitutes working group to develop and regulate digital lending

With frauds in digital lending space coming into sharp relief, the Reserve Bank of India (RBI) on Wednesday constituted a working group to develop and regulate digital lending, including lending through online platforms and mobile applications (apps).

The working group will study all aspects of digital lending activities in the regulated financial sector as well as by unregulated players, said the RBI. “Recent spurt and popularity of online lending platforms/mobile lending apps has raised certain serious concerns which have wider systemic implications,” said the RBI in a statement.

The six-member panel comprising four RBI internal members and two external members is expected to submit its report within three months. Jayant Kumar Dash, executive director, RBI, will be chairman of the group. Other three internal members are Ajay Kumar Choudhary, chief general manager-in-charge, Department of Supervision, P Vasudevan, chief general manager, Department of Payment and Settlement Systems, RBI, and Manoranjan Mishra, chief general manager, Department of Regulation. Mishra will be act as member secretary of the group.

The two external members are Vikram Mehta, co-founder, Monexo Fintech, and Rahul Sasi, cybersecurity expert and founder of CloudSEK.

The group will evaluate digital lending activities and assess the penetration and standards of outsourced digital lending activities in RBI-regulated entities. It has also been tasked with identifying risks posed by unregulated digital lending to financial stability, regulated entities and consumers. Furthermore, the working group is mandated to suggest regulatory changes to promote orderly growth of digital lending. It will also recommend measures for expansion of specific regulatory or statutory perimeter and suggest the role of various regulatory and government agencies, the RBI added.

The working group will also prepare a robust fair practices code for digital lending players, insourced or outsourced; suggest measures for enhanced consumer protection. Finally, the working group will recommend measures for robust data governance, data privacy, and data security standards for digital lending services, the RBI added.

The RBI is of the opinion that digital lending has the potential to make access to financial products and services more fair, efficient, and inclusive. “From a peripheral supporting role a few years ago, fintech-led innovation is now at the core of design, pricing, and delivery of financial products and services,” it said.

While penetration of digital methods in the financial sector is a welcome development, the benefits and certain downside risks are often interwoven in such endeavours.  “A balanced approach needs to be followed, so that the regulatory framework supports innovation, while ensuring data security, privacy, confidentiality, and consumer protection,” regulator added.

Previously, the RBI had warned the general public against unauthorised lending platforms or mobile apps. It had advised the public to verify the background of the company or firm offering loans online or through some mobile apps. This came in response to various reports of individuals and small businesses falling prey to a growing number of unauthorised digital lending platforms and mobile apps on promises of getting loans in a quick and hassle-free manner. In Hyderabad, the authorities had frozen 75 bank accounts related to a multi-crore lending scam. Unfortunately, three people reportedly committed suicide due to harassment by moneylenders and recovery agents, after which this fraud came to light.

Furthermore, the RBI had asked the digital lending platform, which were used on behalf of banks and non-banking financial companies (NBFCs), to disclose the names of the bank and NBFCs upfront to customers.

The RBI has, previously, informed the public that public-lending activities can be undertaken by banks, NBFCs registered with the central bank, and other entities regulated by state governments under statutory provisions.

As economic stress due to the pandemic worsened, consumers have increasingly turned towards to these digital lending platforms and mobile apps for quick short-term loans to tide over difficult times. More often than not, the interest rate charged on such loans are very high. If borrowers were unable to repay in time, recovery agents would resort to harassment, which not only included the person who had borrowed but also his/her family members.

The RBI had acknowledged this in its statement on December 23, 2020, saying, “…reports also refer to excessive rates of interest and additional hidden charges being demanded from borrowers; adoption of unacceptable and high-handed recovery methods, and misuse of agreements to access data on mobile phones of the borrowers”.