India should combat loan sharks online with effective regulation

Source– The post is based on the article “India should combat loan sharks online with effective regulation” published in the “mint” on 24th July 2023.

Syllabus: GS3- Economy

Relevance: Issues related to financial system

News – The article explains the rise of lending by loan sharks.

What are some facts about shark lending?

It is described by excessively high interest rates and intimidating strategies. It focuses on vulnerable individuals.

It takes advantage of low-income individuals and those with restricted access to conventional banking services.

They operate through a network of physical establishments, online platforms, and mobile apps.

What has been the approach of the Indian government towards shark lending?

In August 2017, the RBI mandated that only NBFCs should operate peer-to-peer lending platforms. Despite this directive, only 22 companies had registered as NBFC-P2P lenders with the RBI. Around 1,100 online lending apps are unregistered and unregulated.

To address this issue, RBI established a working group in January 2021 to study digital lending activities by unregulated players. The group’s report, released in November 2021, recommended regulating digital lending.

The report proposes a three-pronged approach. These are legal and regulatory measures, technological advancements, and consumer protection initiatives.

It advocates for the creation of a nodal agency to verify digital lending apps, the recognition of Self-Regulatory Organizations (SROs) to foster a healthier lending ecosystem.

The collection of borrower data with explicit consent and verifiable audit trails, the maintenance of a ‘negative list’ of problematic lenders by SROs, and the formulation of a recovery code of conduct in consultation with RBI are other suggestions.

What are the measures adopted by countries to combat loan sharking and protect borrowers?

Kenya– It has established a self-regulatory body composed of responsible digital lenders. It is called the Digital Lenders Association of Kenya (DLAK). It ensures fair lending practices, transparent interest rates and ethical debt recovery procedures.

Philippines– It has taken steps to differentiate legitimate fintech companies from loan sharks. Its Securities and Exchange Commission introduced regulations that require online lenders to obtain a licence and comply with fair lending practices.

What is the way forward for combating loan sharking?

India needs a comprehensive regulatory framework. It should be guided by a ‘LENDERS’ approach:

Licensing and registration: Implement a system to ensure legitimacy and ethical compliance of all lending entities.

Ethical interest rates: Enforce regulations to cap interest rates, preventing predatory practices and offering reasonable repayment terms.

Non-coercive practices: Prohibit coercive tactics and encourage respectful communication during debt collection.

Disclosure and transparency: Mandate clear and comprehensive information on rates, fees and terms to empower borrowers.

Education and awareness: Use financial literacy programmes to educate people on fair lending.

Redressal mechanisms: Establish accessible avenues for borrowers to report complaints and seek resolution.

Strong legal framework: Strengthen existing laws, introducing severe penalties and deterrents.