In the last few months, we have seen a virtual proliferation of digital lending platforms. Most of them are willing to give away microloans with digital scrutiny, limited paperwork, and almost immediate disbursal. Now RBI has moved in to regulate them.
Lockdown brings focus
One industry that has come into focus in the current lockdown is digital lending. This entails loans via apps with some basic scrutiny and online paperwork. It has also meant that such loans have entailed usurious rates of interest to cover the risk. In addition, digital lending platforms were known to use strong-arm tactics to recover their loans. This has become a lot more prevalent as the recent lockdown resulted in major constraints on economic activity, jobs, and income levels. That has given the background to the new RBI norms.
RBI bats for transparency
The new regulations issued by the RBI on 24 June has been directed at making digital lending more transparent and to avoid banks and NBFCs using digital lending as an opaque front. One of the major areas of contention was banks and NBFCs outsourcing their digital lending needs to such platforms. In such cases, the banks had washed their hands off any coercive steps used by such third-party service providers. It has also tried to standardize some norms.
Onus on banks and NBFCs
On this front, there are some key changes that the RBI has proposed. Banks will now be required to disclose full details of digital lending platforms used for selling their loans. Many banks want to participate in the micro-lending market but do not have the expertise or infrastructure for the same. Here, they can appoint digital platforms but the names of such digital lenders and the nature of the partnership will have to be disclosed in detail. RBI has stipulated that in the event of such partnerships, the bank or NBFC will continue to be answerable to the client and to the RBI for the actions of the digital lending platforms. The banks and NBFCs have also been asked by the RBI to ensure that the digital lenders comply with the Fair Practices Code in letter and spirit.
Need a finer balance
Digital lending is not just an India-specific phenomenon but is picking up in a big way globally. Too much regulation can be counterproductive but the RBI is right in the sense that better regulation will ensure more orderly growth of the digital lending business. As of now, the rates are too arbitrary and they have become digital versions of erstwhile money lenders. That is something that could hamper the orderly growth of digital lending in India. Therefore, timely RBI intervention will only help these digital lenders in the long run.
