The Pattern #13: For digital lending, RBI plays good cop bad cop simultaneously

Mayank Jain   /    Head - Marketing and Content    /    2022-06-10

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    If I had to explain the regulatory function of the Reserve Bank of India as a concept to, say, a six year old, a good way to do it would be to liken it to a school’s principal, watching over its students i.e. banks and other financial institutions. And just like any good authority figure, it’s been all about giving the young ‘uns a few chances before cracking the proverbial whip. But now it seems as though digital lenders are all out of strikes. 

    For months now there have been reports of unauthorized digital lending agents harassing borrowers - sometimes even after the loan has been repaid. It’s led to severe anxiety among already struggling borrowers, even driving some to suicide. In fact, a while ago we wrote about how the RBI’s public complaints portal received over 2,500 complaints against digital lending apps between January 2020 - March 2021.

    Taken from: https://www.hindustantimes.com/business/rbiled-panel-suggests-reining-in-lending-apps-101637282012419.html

    Things don’t seem to have improved and enough is finally enough. Just yesterday, RBI Governor Shaktikanta Das said that the watchdog will soon release some form of a regulatory architecture for digital lending platforms. 

    Sure, the very reason these apps and FinTechs emerged is because tightly regulated banks could not innovate at the scale and speed needed to meet customer demand.  They’ve furthered the cause of financial inclusion in a country where 38% of bank accounts have been inactive for a year or more.

     

    However, there have been more than just a few bad apples. With misleading marketing and unclear terms, people desperately in need of financial help (especially during the height of the pandemic) were lured into what seemed like affordable loans. Clearly, things didn’t pan out as they expected.

    That’s just one of the reasons why I welcome this move. Banks still win on the battleground of trust - they have the advantage of legacy and regulation. 

    FinTechs have struggled to build trust among users, many of whom don't understand how the technology works and/or don’t know how and where their data is being used. The RBI playing a bigger role in this space is bound to give borrowers some peace of mind.

    Naturally, there will be concerns around stifling innovation and creativity - but those concerns, in my opinion, are largely unfounded. The stick, in this case, comes with a carrot.

    In 2019, the RBI rolled out its regulatory sandbox framework where FinTechs can, in a contained environment overseen by the RBI, experiment with products that are outside current regulations.

    (Tiny plug: We’ll be testing our Embedded Finance product as part of the third cohort under the RBI regulatory sandbox. Read the RBI press release here.)

    In other big news, the RBI has raised the repo rate by 90 basis points in two months to control inflation. As a result, several major banks, including HDFC, ICICI, and the Bank of Baroda have hiked their home loan interest rates. This isn’t just for new loans - existing loans with floating interest rates are also set to get more expensive. 

    It’s not just individual borrowers who’ll bear the brunt of the repo rate hike though - BNPL players will be hit too. With the cost of funds rising, they may need to look at revamping their business model and cutting back on zero interest lending (one of the biggest BNPL USPs). Those who prioritized profitability at the outset needn’t worry, but it will be interesting to see if and how the others pivot (If you’re in the middle of your search for a BNPL/Fintech partner, here’s our quick guide on what to keep in mind).

    Looks like we'll be hearing lots from/about RBI in the coming days. Here's to action-packed weeks at work and wrapping it up all for you every Friday evening! 

    That’s it from me for now - as always, leaving you with my reading recommendations for the week:

    Thank you for reading. If you liked this edition, do forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to never miss any of our updates. 

    See you next week! Cheers, Mayank

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