Digital Lending Space
The Reserve Bank of India (RBI) issued the first set of guidelines for digital lending, to crack down on illegal activities by certain players. Towards addressing concerns that had sprung up, the RBI had constituted a Working Group on ‘digital lending including lending through online platforms and mobile apps’ (WGDL) in January, 2021. The group has proposed stricter norms for digital lenders in November 2021.
Digital lending is one of the fastest growing fintech Segments in India and it grew exponentially from the volume of US dollars 9 billion in 2012 9 to nearly 110 billion dollars in 2019.
Digital lending utilizes automated technologies and algorithms for decision making, customer acquisition, disbursements and recovery. Landing Service Providers act in partnership with Non-Banking Financial Companies (NOFC) who disburse credit to the customer using the former's platform.
Significance of Digital Lending:
1. Financial Inclusion: It helps in meeting the huge unmet credit need, particularly in the micro enterprise and low-income consumer segment in India.
2. Reduce borrowing from Informal Channels: It helps in reducing informal borrowings. as it simplifies the process of borrowing.
3. Time Saving: It decreases time spent on working loan applications in branch. Digital lending platforms have also been known to cut overhead costs by 30-50%.
Recently, RBI (Reserve Bank of India) issued the first set of guidelines for digital lending, some of which key points are:
- For Loan Disbursals and Repayments: All loan disbursals and repayments will be required to be executed only between the bank account of borrower and regulated entities.
- Regarding Payment: The new rules mandate that fees or charges payable to LSPs in the credit intermediation process will be paid directly by the bank or NBFCs.
- The new norms prohibit increase in credit limit without explicit consent of the borrower.
- The data collected by digital leading apps has to be need-based with customer's prior consent and can be audited if required.
- Reporting of Loans:
a) REs are required to ensure that any lending done through DLAs has to be reported to Credit Information Companies (CICs).
b) Leading through the Buy Now Pay Later (BNPL) model also needs to be reported to CICs.
With the advent of technological innovation, there has been immense development in the digital lending ecosystem, which has resulted in several fintech firms extending credit services.
Apart from establishing technological safeguards, educating and training customers to spread awareness about lending is also important. Digital lenders should proactively develop and commit to a code of conduct that outlines the principle of integrity, transparency and consumer protection with clear standards of disclosure and grievance redressal.
India is on the verge of a digital leading revolution and making sure that this lending done responsibly can ensure the fruits of revolution.