RBI Recommendations on Digital Lending

RBI Recommendations on Digital Lending

News: A Reserve Bank of India (RBI) Working Group (WG) on digital lending has recommended separate legislation to oversee such lending as well as a nodal agency to vet the Digital Lending Apps.

Digital Lending
• Digital lending is the process of availing credit online.Its increased popularity amongst new-age lenders can be attributed to expanding smartphone penetration, credit range flexibility, and speedy online transactions.

Significance:
• India has a huge growth potential when it comes to the Digital Lending landscape.
• Digital lending is mostly preferred by those who are generally not able to avail any credit through the formal sources of finance, like banks.
• Digital lending is mostly preferred by those who are generally not able to avail any credit through the formal sources of finance, like banks.
• Digital lending is a powerful tool that can be used for financial inclusion.
• With new innovations underway, digital lending offers much better products to the masses at a much faster rate which is even more cost-efficient.
• Online lending has played a pivotal role in evading cumbersome red-tapism usually involved while availing loans offline in a traditional setting.
• The online lending platforms have gained massive popularity among MSMEs post-Covid as they were unable to secure finance through traditional lending.
• The quick turnaround time and onboarding, easy KYC, as well as disbursement within minutes have attracted the cash-crunched MSMEs towards these digital routes to secure credit.

Issues with Digital Lending
• There are many gaps that are existent in this model of digital lending like any new business operation.
• Unauthorised lenders provided credit to customers without any collateral and at exorbitant rates coupled with unachievable deadlines to pay off these humongous debts.
• Resultantly, borrowers were coerced by the lenders to recollect when they were unable to pay off these debts. We see many cases of suicides due to such harassment.

Recommendations by RBI
• RBI has mooted a Self-Regulatory Organisation for participants in the digital lending ecosystem.
• Development of certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions.
• Disbursement of loans directly into the bank accounts of borrowers; disbursement and servicing of loans only through bank accounts of the digital lenders.
• With the prior and explicit consent of borrowers with verifiable audit trails.
• Standardized code of conduct for recovery to be framed by the proposed SRO in consultation with RBI.
• There is a growing need for regulation in this space or unauthorized players like pointed out above will keep popping up.Stringent provisions must be formulated which can be enforceable legally.
• Regulation must be enforced in this industry soon to ensure consumer trust remains unfettered.