Ever since the onset of the Covid-19 pandemic, and the subsequent lockdown, the RBI has received multiple complaints against the digital lending platforms that assure quick access to quick and easy money to borrowers. These platforms that function through apps have been under the radar of RBI (The Reserve Bank of India) ever since the reports of malpractices by some of these platforms popped up. The central bank has come down heavily on them since complaints about exorbitant interest rates, harsh recovery measures, non-transparent methods of calculating interest, and unlawful use of personal data against the lending platforms have started coming up.
What Led to the Mushrooming of Digital-lending Business?
The main reason that led to the growth of this app-driven microfinance segment across the country could be attributed to the ignorance of the borrowers who tend to overlook several factors such as interest rates, penalties, and the track record of the lenders. The real trouble began when cash flows started drying up due to the sudden onset of the pandemic, which led to the sudden spike in default rate.
Moreover, the recovery turned out to be nightmarish for borrowers who readily volunteered to share data regarding their contact list while installing the App. Lenders tapped into these lists to demean the borrowers to make payments. On certain occasions, the digital lending platforms presented themselves as financers without revealing their names (banks or non-banking companies). Consequently, borrowers cannot seek redress to their grievances available under the regulatory framework.
What has changed in Recent Times?
With the intent of augmenting customer protection and creating the digital lending ecosystem a safe zone, the RBI has listed measures that lenders and their digital partners (Apps) would require abiding by while providing funds to borrowers.
In a circular issued by the RBI, the digital lending platforms would now require disclosing the names of NBFCs or banks associated with them to provide capital to the borrowers. In a significant development, digital lenders would have to send a sanction letter before implementing the loan agreement on the letterhead of their partner banking or non-banking finance company. Once the loan is sanctioned, the lender and the digital partner would require sending a copy of the agreement to the borrower mentioning all the terms and conditions clearly.
RBI’s working digital lending group has recommended stringent norms for digital lenders, including discrete legislation to keep a check on unlawful digital lending activities. According to the lending group, digital lending platforms should undergo a verification process by an agency that could be set up in association with the stakeholders. Besides this, the setting up of a self-regulatory Organisation (SRO) including the members within the digital lending system, disbursement of funds directly into the bank account of borrowers, and servicing of loans through the bank account of lenders is proposed.
After the RBI has circumcised the crypto regulation in India, the new rules and regulations set forth by it has brought the digital lending platform under the radar. Following this, the lending agencies would have to ensure that their digital partners abide by the RBI rules and regulations regarding lending and recovery of the loans. So, whether these digital platforms can manage the burden of the new rules or end up going hay way remains to be seen.