Explained: Why digital lenders have come under the scanner

What is the News?

RBI has cancelled the Certificate of Registration(CoR) issued to P C Financial Services Pvt Ltd, which was primarily engaged in mobile app-based lending operations through an app called ‘Cashbean’.

The registration was cancelled as the company was found charging a usurious rate of interest and other charges to its borrowers in an opaque manner apart from indulging in unauthorised use of logos of the RBI and Central Bureau of Investigation for recovery from the borrowers.

What is Digital Lending?

Digital lending refers to the online disbursal of loans where all processes, even loan approval and recovery, take place remotely, typically through mobile apps.

What are the concerns with Digital Lending?

As per the RBI Working Group report, there were around 600 illegal lending apps that usually charge high-interest rates, adopt unacceptable and high-handed recovery methods and operate in an opaque manner.

The number of these lending apps will increase further. These 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.

What are the suggestions of the RBI working group on Digital Lending?

The RBI is likely to come out with a comprehensive regulatory framework for digital lending soon. The working group set up by the RBI has proposed stringent norms for digital lenders. These norms include: 

– A separate legislation should be enacted to oversee Digital Lending.

– Digital lending apps should be subjected to a verification process by a nodal agency to be set up in consultation with stakeholders.

– Regulators may consider introducing interest rate caps in a phased manner, broadly in line with the effective interest rates of credit cards.

– Disbursement of loans should be made directly into the bank accounts of borrowers, and servicing of loans should be done only through the bank accounts of the digital lenders.

Click Here to read other recommendations

Source: This post is based on the article “Explained: Why digital lenders have come under the scanner” published in Indian Express on 1st March 2022.