Unorganized lending has gone digital in India – Finance and banking

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‘Your loan of INR X,XX,XXX/- has been sanctioned. Click the link below to get the money in your account, without any paperwork or processing fees. https://xyz.com/xyz/xyz.’

With the crackdown on digital lending platforms in China, several of these platforms have redirected their resources to India, targeting the vulnerable part of the country.

Traditionally, the unorganized loan market has always been widespread and familiar in India. The said market provides an easier mechanism to avail quick short-term loans, with the overall process being much more familiar than the tedious process of availing loans from banks. However, simplicity comes at the cost of higher interest/penalty rates accompanied by illegal means of collection.

Unorganized Lending Digital Marketplace

The rapid development of the telecommunications sector has inadvertently enabled a large-scale expansion of unorganized credit markets (twelve times more between 2017 and 2020). Today, the number of online lending platforms is increasing exponentially. These platforms provide loans without any significant collateral or documentation requirements. Moreover, these platforms are so fast that applicants get their money within an hour of filling in their application/forms. For these reasons, the general public is attracted to loans from these platforms.

However, all that glitters is not gold. Several cases have been regularly reported against these platforms, where users have made allegations of harassment, inflated loan amounts, coercive collection techniques, and breach of data and private information. Generally speaking, it is also commonly believed that collection methods adopted by unorganized credit players may also be illegal, which has also in the past led to some borrowers committing suicide after being harassed by lenders.

Regulatory framework

On August 24, 2017, the Reserve Bank of India (RBI) clarified that the activity of peer-to-peer (P2P) lending platforms, i.e.
“the activity of providing, under contract, the lending facilitation service, via an online medium or otherwise, to participants who have entered into an agreement with this platform to lend on it or to benefit from the loan facilitation services provided by it‘, should only be undertaken by a Non-Banking Financial Company (NBFC). Further, on 04 October 2017, RBI issued comprehensive guidance for P2P lending platforms in the form of ‘Main directions – Non-banking finance company – Peer-to-peer lending platform (Reserve Bank) directions, 2017′. However, as of September 30, 2021, only 22 businesses have registered with the RBI as NBFC-P2P, while there are approximately 1,100 loan applications available online.

Obviously, several entities have undertaken digital lending activities without any registration with the RBI in any form. RBI voids its press release dated December 23, 2020, members of the public also warned ‘not fall prey to such unscrupulous activities and check the background of the company/company offering loans online or through mobile apps’.

The RBI observed that, among others, banks and NBFCs have also used digital lending platforms to provide loans to their customers. Being engaged in the lending business, banks and some NBFCs (such as the Investment and Credit Company) are allowed by the RBI to use various means including digital lending to carry out their business. However, in a notification dated June 24, 2020, the RBI again emphasized that the outsourcing of any activity by banks or NBFCs does not diminish their obligations to comply with regulatory instructions (including the Code of Fair Practices and outsourcing guidelines), an obligation that is theirs alone. .

Unfortunately, not all entities and participants engaged in digital lending fall under the jurisdiction of the RBI, so regulations issued by the RBI have little or no effect on these institutions.

Therefore, on January 13, 2021, the RBI set up a task force to study all aspects of digital lending activities by unregulated players so that a proper regulatory approach to digital lending platforms can be framed. (“Work group“). The said working group delivered its report on November 18, 2021 (“Report“), addressing various issues identified by the RBI, regarding digital lending, and providing its recommendations thereon.

The report proposes to follow a three-pronged approach based on (i) legal and regulatory recommendations, (ii) technological recommendations and (iii) consumer protection recommendations, which are mentioned therein. The main recommendations are as follows:

  • Establishment of a nodal agency for the verification of digital loan applications.

  • Recognize self-regulatory organizations (SROs) to build a healthier ecosystem.

  • Borrower data should only be collected with prior and explicit consent, with verifiable audit trails.

  • Maintenance of a “negative list” of loan service providers by the SRO.

  • Code of conduct for collection to be overseen by SRO in consultation with RBI.

Path to unlimited potential

The report basically identifies that due to the marginal penetration of the digital sector in the lending and borrowing market, the potential for growth of digital lending business in India is exponential. It must therefore be used efficiently. However, the characteristics of the technology also pose challenges for regulators as it becomes difficult to identify the source of the content (funds in the context of digital lending) and, therefore, it becomes even more difficult to regulate it.

The suggestions in the report go in the direction of establishing a separate authority to govern digital lending platforms. At the same time, the report also recognizes that to promote growth and innovation in the sector, active assistance from market players (such as the Digital Lenders Association of India) would also be needed in the form of self-regulation and formulating fair practices. code for attendees.

Although the task force has fulfilled its task to a large extent, the implementation of the suggestions made by the task force would be a very difficult task for any authority in the field. Implementation would also take a long time as multiple factors would need to be considered when formulating the required regulations. With the increasing number of incidents every day, time is a luxury that will cost more and more citizens who fall prey to these predatory digital lending platforms.

It is important that the regulators concerned as well as the central legislature take a collective initiative to address immediate concerns and to safeguard the interests of the public. Once a draft bill or ordinance is enacted, it should prove useful for the authorities to pave the way for a full legislature on the report’s directions addressing the concerns identified by the task force, while maintaining a steady pace of growth and development of the digital lending industry in India.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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