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Sachet, the Reserve Bank of India’s portal for complaints from the public, received over 2,500 complaints against digital lending apps between January 2020 to March 2021. It’s no coincidence that this spate of complaints coincided with the COVID-19 outbreak in India. The pandemic-induced lockdown put many in a financial fix.
Individuals and small businesses needed short term credit to tide over this setback, and a slew of digital lending apps took advantage of this demand to offer unsecured loans at exorbitant interest rates. To do this, they sought permission to access borrowers’ phones to collect contact information, photos, locations, text messages, and more.
When, inevitably, borrowers were unable to repay these loans on time, lenders publicly shamed them, harassed their contacts, and misused their personal data. This harassment has pushed several to suicide since the beginning of the pandemic.
The Reserve Bank of India’s Report of the Working Group on Digital Lending including Lending through Online Platforms and Mobile Apps, takes a critical look at the spurt in digital lending apps in the country and the rise in unethical practices. It lays out some startling facts - out of the approximately 1100 digital lending apps available to Android users in India, over half of them (600) are illegal.
However, the bad apples shouldn’t tarnish an industry that has improved financial inclusion in India and fulfilled an increasing demand for short term credit.
As of December 2020, NBFCs had disbursed INR 8827 Cr in loans with tenures of up to 30 days - over ten times more than scheduled banks did in the same segment. When it comes to 60 day loans, NBFCs disbursed double the amount banks did. Clearly, these new-age lenders are filling a gap and the good apples must not be punished for the acts of the malignant ones.
So, what are the corrective measures that the RBI has prescribed to ensure growth doesn’t come at the cost of consumer protection? What does it have to say about the future of traditional lenders in an increasingly digital world?
Data security must be made priority: Digital lenders leverage alternate data such as location and device data in order to underwrite borrowers. They therefore have access to sensitive personal information that must be handled with utmost care. Among other things, the report recommends that digital lenders have an established process to demonstrate what kind of data is being used when approving loans and how the quality of that data is being assured. It has also suggested sector-specific data protection regulatory frameworks for digital financial services.
Here’s where a product like FinBox’s DeviceConnect comes into play. The fully secure, in-device risk engine covers 92% of digitally acquired customers, leveraging real-time cash flow data for risk assessment. It is completely in alignment with Data Empowerment and Protection Architecture, and any information accessed is done with full consent. The data also remains completely secure both at rest and in motion.
Banks will need to catch up: According to the report, digital disbursement of loans jumped twelve-fold between 2017 and 2020. While in 2017, the number of digital loans disbursed by banks and NBFCs were largely on par, the latter has made significant strides in this regard over the last three years. Digital loans aren’t going anywhere. If banks want to remain relevant, they must launch use case-driven apps and digital financial products to appeal to younger target audiences - specifically millennials and Gen Z who do not have any credit history but are looking for short-term credit such as BNPL.
Competition should be encouraged to benefit borrowers: Digital lenders have often come under fire for exorbitant interest and lack of transparency in this regard. The entry of banks - that generally charge lower rates of interest - will force digital players to lower their rates and extra charges. In fact, this is something that the report actively encourages.As part of the suggestions for future examination, the report calls for the initiation of ‘digital-only’ banks. The proliferation of new players in digital lending will only mean increased choice and optimal costs of end borrowers.
Digital lenders must educate customers: Digital lenders serve customers across demographics. Many of these customers are completely new-to-credit, and many do not always read or understand the fine print. This leads them into debt traps where they can’t repay their loans on time. The report strongly advocates for customer education in digital lending, and says that integration of educational messages in digital product design to report unfair collection practices should be mandated. It also suggests that digital lenders should provide credit bureau education and teach end customers how to maintain a good credit history.
What’s illegal offline, will be illegal online: The report takes a proportionate approach to the ‘same activity, same risk, same rule’ for the entire lending ecosystem, be it digital or physical. This is especially relevant considering that a number of unscrupulous collection practices in digital lending are identical to those in traditional physical lending.
RBI’s digital lending report unequivocally states that protection of financial consumers’ interest would always weigh heavier than the interest of innovation - as it should. The report provides adequate guard rails to ensure that legitimate lenders can continue to function smoothly, while unethical and fraudulent players are weeded out.
Now, it remains to be seen how many of these recommendations will eventually be implemented and how FinTechs respond to regulations. However, the fair players in the market should wholeheartedly welcome regulatory oversight that not only protects their business models but also gives them room to grow - without hurting the borrowers.