[Answered] The Reserve Bank of India (RBI) has released the first set of norms to regulate digital lending. What was the rationale behind regulating digital lending, and what more can be done?

Digital lending refers to the online disbursal of loans where all processes, including loan approval and recovery, take place remotely, typically through mobile apps. According to the Reserve Bank of India (RBI) working group report, over 6% of all loans given by commercial banks in April-December 2020 were digital. This is a significant increase from 1.5% in 2016-17. A borrower-friendly approach, reduced paperwork, high availability, and economic implications of the covid pandemic are the reasons for the increased surge in digital lending.

Rationale behind regulating digital lending:

• At present, digital lending is a nascent segment in the Indian financial sector.
• There are unsecured third-party appsfor lending in this segment in India. The RBI panel found that more than 50% of loan apps in the market may be illegal.
• These lending apps could also collect the user’s personally identifiable information (PII), financial data and other sensitive details which can then be used to compromise the user’s accounts, carry out phishing attacks and identity theft.
• The digital lenders are finding it hard to sell such products to digitally unaware customers who don’t understand the implications and fine print.
• The central bank is concerned about the possibility ofwidespread defaults in this segment and cascading effects.
• Aggressive growth of digital lending at the cost of quality of lending can lead to deterioration of asset quality for banks below the tier-1 category.

What more can be done? 

• The government needs to legislate for the norms and entities within the regulatory purview and should set up an institutional mechanism
• The RBI could ensure greater transparencyby mandating disclosure of all fees and charges.
• The RBI could regularly release aggregated and anonymized data to give a sense of market size and growth rates.
• A nodal agency should be set up which will verify the technological credentials of digital apps of balance sheet lenders and lending service providers. It will also maintain a public register of verified apps on its website.

The digital banking landscape is now more dynamic than ever. Lending requirements have evolved and to stay relevant, financial institutions need to go digital. In this way, the set of norms released by RBI, to regulate digital lending is the right step.