There’s a lot about Beijing’s infrastructure push and investment-driven growth that India wants to emulate. But when it comes to consumer economics, emulating China’s out-of-control digital lending boom is strictly off the political agenda. The Reserve Bank of India’s recently released guidelines for app-based lending show a clear desire to rein in the industry after its pandemic-era excesses.
The RBI wants to strike a better balance between digital lending‘s ability to democratize credit and its potential to suck people into a debt trap. The typical fixed cost of issuing, servicing and collecting a loan is 5,000 rupees ($60) for banks; for online platforms, it’s a few hundred rupees, according to industry sources. As mobile internet becomes ubiquitous, apps can sell small loans across the big country more efficiently than traditional lenders. This helps explain the eight-fold increase in local Paytm loans in the past year alone.
On the other hand, the RBI wants to put an end to the most harmful aspects of the industry, especially related to the invasion of privacy. Regulator says it blocks app access to “mobile phone resources such as files and media, contact list, call logs, telephony features” and other personal data used to harass borrowers with impunity. Yes, lenders can request microphone and camera access to verify new clients, but the one-time privilege will require the borrower’s explicit consent.
The Indian regulator also requires customers to be informed in advance of the overall cost of interest and given a consultation period during which they can change their mind. Digital apps will be paid for by regulated banks and non-bank financial companies who will engage them as intermediaries, not by borrowers.
Chinese regulators have let banks outsource not just loan distribution but virtually all credit risk management to unregulated software and hardware firms. As a result, they pocketed the bulk of the profits. By contrast, the RBI signals that it would be more comfortable with interest margins split roughly in the middle – between the banks that provide the funds and the digital platforms that issue loans and collect payments. In the event that the company behind the application guarantees part of the lender’s loss from a bad loan, the central bank’s rules on asset securitization will apply. Basically, the RBI does not want credit risk to develop in the shadows – where it has no control.
This is altogether a more sensible approach. Some 1,100 loan apps proliferated in India at the height of the pandemic-induced chaos, promising all kinds of quick credit and buy-it-now-pay-later arrangements. More than half of them operated illegally, many of them leasing the balance sheets of local non-banking financial companies. Some of these underground operators disappeared after converting profits of at least $125 million into cryptocurrencies and transferring them to foreign wallets, according to media reports. The RBI guidelines would go some way to clearing the ground before it becomes a systemic risk.