A remote and automated lending procedure known as “digital lending” makes extensive use of seamless digital technology for customer acquisition, the credit assessment, loan approval, payout, recovery, and related customer care. The Reserve Bank of India (RBI) established a framework to control online lending. It is disbursing and collecting loans via websites or mobile apps. It facilitates fast disbursal and lowers costs. However, these platforms frequently engage in risky behavior by lending to borrowers who cannot repay the money. The Reserve Bank of India (RBI) recently established a framework governing the nation’s digital lending market. The RBI launched a working group on digital lending, including online platforms and mobile apps, in January 2021. The panel was established as a result of worries about ethical business practices and customer protection that have emerged as a result of the boom in digital lending activity. Digital lending is one of the fintech industries in India. It has grown significantly from a volume of US$ 9 billion in 2012 to almost US$ 110 billion in 2019.
Furthermore, it is anticipated that by 2023, the digital lending market will have grown to about US$350 billion. Small borrowers without a history of credit history who conventional financial institutions don’t cater to, are among its clients in particular. Short-term loans, especially those with terms of fewer than 30 days, are their primary area of expertise. Commercial banks are quickly integrating into the category of financial intermediaries by either partnering with NBFCs to create synergies or by lending digitally.
To crack down on illicit activity by some participants, the Reserve Bank of India (RBI) has announced the first set of guidelines for digital lending. The RBI created a Working Group on “Digital Lending (WGDL), including Lending through Online Platforms and Mobile Apps to address the issues.” In November 2021, the group suggested more substantial standards for digital lenders; some of these standards have been adopted and are now part of the new standards, while others are still being looked at.
Benefits of Digital Lending:
- Better customer experience: Digital lending saves applicants from waiting a long time for a loan decision and has a short response time. Banks also spend less time and money managing loans due to this. Banks can handle more loans and products and give borrowers a better experience if they have quick loan approval and money.
- Easy loan disbursement: By reducing geographic obstacles, digital lending platforms have made it possible for borrowers to submit loan applications immediately. They feature simple data entry, a customized user interface, and efficient loan application processes.
- Fewer Errors: Since obtaining an applicant’s information using digital lending is simpler, there are fewer human error risks. The validity of documents can be digitally scanned, speeding up and ensuring accuracy.
- Enhances efficiency: It can undoubtedly increase efficiency while cutting costs overall. Digital lending reduces time, boosts revenue and growth, and strengthens relationships between lenders and borrowers.
Need for Digital Lending:
Using a digital lending platform has significantly increased productivity and revenues for financial organizations. At the point of sale, it allows for quicker service delivery, and digitized data also provides correct evaluation, which is essential for making the best credit decisions. Additionally, digital lending platforms support the development of smart customer engagement. The borrowers gain from it in that they have the freedom to select a loan product that best suits their needs, has timely, remote access to financial support, and can get the credit that is optimized without having to deal with cumbersome paperwork. It increases customer satisfaction, quickens the feedback loop, and offers various loan source options.
Significance of Digital Lending:
- The RBI has imposed these rules to prevent consumer misselling, unethical business practices, and outrageous interest rates.
- To prevent customers from excessive third parties being involved in digital lending transactions.
- It makes quick disbursal possible and aids in cost savings.
- Lending Service Providers (LSPs) collaborate with Non-Banking Financial Companies (NBFCs), which use the former’s platform to grant credit to clients.
- This platform has the capacity to lend more than a borrower is capable of.
New Regulations Regarding Digital Lending:
- Transparency: Lending must be done by organizations that are either under RBI regulation or have been granted a license to operate by relevant law.
- Loan payments and disbursements: The RBI has stipulated that all loan payments and repayments must be made directly between the entity’s and the borrower’s bank accounts.
- Important information: Before the contract’s execution, lenders would have to provide the borrower with standardized information on all fees, levies, and the annual percentage rate(APR).
- Annual rate: It alludes to the annual percentage rate that is charged for taking out a loan, which includes processing costs, fines, and all other fees related to it. Borrowers would find it simpler to compare their offerings to those of market rivals.
- Give borrowers a KFS: Before signing the loan contract, all digital lending organizations must give borrowers a KFS or Key Fact Statement.
- Unable to increase credit limit: Customers’ credit limits cannot be increased by LSPs without permission.
- Office of the Grievance Redresser: Entities would need to establish a grievance redressal officer to fulfill the need for a specialized resolution system. Borrowers may file a complaint with the RBI’s Integrated Ombudsman Scheme if the bank does not resolve their complaint within 30 days.
- Cooling-off time: Digital lenders must now offer a cooling-off period so that borrowers have the choice to pay back the principal sum and associated APR without incurring penalties. This cooling-off period must be expressly stated in the loan contract.
- Consent for data collection: Lending institutions may only gather data as needed. Additionally, there should be audit trails and prior, informed agreement from the borrower.
- Resolution of complaints: REs are required to resolve consumer complaints within 30 days or within a predetermined time frame. If there is no settlement within the allotted time, the borrower may file a complaint with the RE.
- RB-IOS: Integrated Ombudsman Scheme (RB-IOS) of the RBI, should the complaint not be handled within 30 days of receipt, will also be responsible for the ecosystem.
- Data regulation: All information gathered by the applications must be “need-based” with the borrower’s express prior approval. The option to revoke previously granted permission is available to users. During enrollment, the privacy policy must specify the data gathered. According to RBI, user approval is required before sharing personal data with a third party.
- Disclosure of Loans: Regardless of the type or duration of the lending, REs must make sure that DLA lending is reported to Credit Information Companies (CICs). More crucially, CICs must be informed about lending that uses the Buy Now Pay Later (BNPL) paradigm.
RBI’s New Purview:
The RBI categorized digital lenders into three groups while establishing the rules.
- Those organizations that are under RBI regulation and have a license to do lending operations.
- Those organizations that are not under RBI regulation but are permitted to conduct lending under other statutory or regulatory provisions.
- Those organizations that lend without regard to any law or regulatory requirements.
The regulatory framework of the central bank is concentrated on the digital lending ecosystem of regulated firms and the LSPs used by them to extend different legal credit facilitation services. The lenders in the other categories are exempt from the new legislation; therefore, they are free to develop suitable criteria for digital lending based on the working group’s recommendations.
Challenges of Digital Lending:
- Since many of the lending applications offered to Indian Android users are either not authorized by the RBI or have NBFC partners with assets of less than Rs. 1,000 crores, they are all unlawful. For this sector, there was no standardized regulatory standard.
- Due to the intense competition in the market, it has been discovered that loan service providers engage in risky lending activities. They are found to provide credit to borrowers who cannot repay it. All consumers are now paying higher interest rates as a result of this.
- Serious concerns about the loan service providers’ unscrupulous collection methods, outrageous interest rates, unfair business practices, and misselling have also been raised.
- There may have been a breach of the borrowers’ data privacy due to the direct involvement of third parties and the disclosure of personal information. With regard to this particular segment, this is a serious worry.
- LSPs frequently engage in risky lending practices by providing a loan that is more than a borrower’s ability to repay to establish their position in a market with many other competitors. The risk is reduced by distributing the overall risk to customers and charging higher interest rates.
- The main issues are unrestricted third parties use, miss-selling, privacy violations, unfair business practices, charging astronomical interest rates, and unethical recovery methods.
Conclusion:
India is on the verge of a financial technology revolution. It may ensure that the advantages of this revolution are released by ensuring that this lending is done appropriately. Digital lenders should proactively establish and uphold a code of conduct that outlines the principles of truthfulness, transparency, and consumer protection and includes detailed disclosure and dispute resolution instructions. Although the percentage of digital lending may be tiny, given their scalability, they could soon overtake traditional lenders in importance. It remains to be seen how the new restrictions will affect the operational models used by digital lenders. The regulations have done an excellent job of protecting the interests of consumers (borrowers) without placing an unnecessary burden on lending organizations or platform operators. The government’s goal of financial inclusion has a lot of potential to be advanced through the digital lending ecosystem. Therefore, the ecosystem needs to be adequately supported and fostered.