Govt, RBI must tie up to uproot illegal digital lending apps: DLAI

Top executives of the Digital Lending Association of India (DLAI) have urged the government and the Reserve Bank of India (RBI) to come together to crack down on unregulated digital lending apps, which continue to have a presence in some form.

However, the mushrooming of such apps has come down to a large extent since the digital lending guidelines were brought in by the central bank.

“There needs to be a coordinated effort between the government and the regulator to crack down on the unregulated apps. They continue to operate, without adhering to any of the regulations. This is the need of the hour and we have offered our assistance in any way possible,” said Sashank Rishyasringa, president, DLAI.

Unregulated digital lending apps mushroomed during the pandemic as the economic downturn witnessed during this period led many borrowers to resort to such apps for immediate need of funds. Quite often, these apps charged astronomically higher interest rates from customers. During recovery, they resorted to unfair practices, which resulted in the death of many borrowers across the country.

“A few bad apples have caused problems for everybody in the ecosystem. We continue to see some of these apps popping up now and then. But they are definitely far less than what they used to be,” said Anuj Kacker, vice-president, DLAI.

This prompted the RBI to do a thorough study on digital lending. Consequently, RBI came out with the guidelines on digital lending in September last year.

This resulted in digital lending fintechs making either operational changes in their business model or completely tweaking their model so that they are not in contravention of the norms.

“It was perhaps a pit stop. It definitely made everyone look at their workflows and make changes,” said Anurag Jain, founding member of DLAI.

Meanwhile, DLAI — in its discussions with the regulator — has raised the issue of a blanket ban on first loss default guarantee (FLDG).

“Our perspective remains that some kind of a risk-sharing model is essential to unlock liquidity to new credit customers. We also understand that the regulator has concerns around the build up of systemic risk,” said Rishyasringa.

FLDG is a lending model wherein a third party guarantees to compensate up to a certain percentage of default in a loan portfolio of the regulated entity (RE).

DLAI has also sought clear licensing pathways and operating rules for the ecosystem.

“A lot of our members, who are LSPs (lending service providers) feel they would benefit if there is clarity on their role in unlocking credit. Also LSPs, who want to convert to NBFCs (non-banking financial companies), would benefit from a clear process to do so. Similarly, there are REs in our association, who are keen to submit to further regulation if that gives the ability to scale — a pathway to small finance banks and issuing credit cards, among others,” said Rishyasringa.