Lending Transparency

Source– The post is based on the article “Lending Transparency” published in The Business Standard on 12th September 2022.

Syllabus: GS3- Indian Economy

News- The article explains the concerns related to loan apps and issues related to recent RBI exercise of vetting loan apps.

The Finance Ministry has asked the RBI to check digital loan apps and compile a “whitelist”. The Ministry of Electronics and Information Technology (MEITY) has been asked to coordinate with the RBI and service providers such as Google Play and Apple App Store to ensure that only loan apps on the RBI whitelist are available for download.

What are the concerns related to loan apps?

These applications provide loans to vulnerable, tech-illiterate people, and low-income groups at exorbitant interest rates with hidden processing fees and charges.

Lenders also use predatory loan recovery practices involving blackmailing and criminal intimidation.

There is also the possibility of money laundering and tax evasions.

There are also concerns related to indebtedness of households. The RBI data shows the financial indebtedness of households was 40% of GDP in May 2021.

What can be done by the RBI?

It can create a checklist of information pertaining to interest rates, fees and other charges, all of which should be clearly published by any loan app.

It could set ceilings on interest rates and impose penalties for violations.

For data protection, the RBI could check the apps that collect more data than strictly necessary to generate credit scores and process loans, and that all such data are collected with permissions, and not shared with other entities. It could publish such data-collection standards in the interests of public safety.

It should work with the Income Tax Department and other departments to detect the cases of money-laundering.

However, the RBI must ensure that it does not exclude legitimate players by setting complicated, opaque standards for whitelisting. It must also ensure that its process of approval or rejection is prompt and offer reasons to the applicant in cases of refusal.

What can be done by other organs of government?

To prevent use of strong arm tactics to extract money from borrowers, executive and the judiciary need to ensure that citizens are not harassed, while accelerating processes of loan recovery.

MEITY could coordinate with Apple and Google to ensure non-compliant apps are kept off these stores.

To  prevent “side-load” apps that can be installed by sending a link bypassing Apple and Google app stores, we should educate potential borrowers to avoid these practices.