RBI Report on Digital lending: Good and bad sides of digi lending, in 5 charts

What is the news?

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. If regulated well, innovative and cost-efficient models can help digital lending leapfrog traditional lending modes.

What is digital lending?

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

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.

What are the key findings of the RBI panel?

Huge increase in digital lending: The panel recorded a 12-fold jump in the credit disbursed digitally (₹1.4 trillion) by a sample of commercial banks and non-banking financial companies (NBFCs) between 2017 and 2020.

Rise in small-ticket retail loans: Personal loans made up the lion’s share—just over half by value—of all digital loans given by banks. This was followed by loans to small and medium enterprises (16%). “Buy now, pay later” loans had less than 1% share by value but commanded a 37% share by the number of loans.

The rise in retail loans is due to an increase in demand for housing, vehicles, and education loans during the pandemic. For the first time in 2021, retail loans became the largest segment in India’s credit market by overtaking industrial loans.

Private banks in lead: Private Banks and NBFCs dominate the digital lending space, with a 55% and a 30% share, respectively, as of 2019-20. The share of public sector banks increased from 0.3% to 13% between 2016-17 and 2019-20.

Unsecured third-party apps for lending: The RBI panel found that more than 50% of loan apps in the market may be illegal. Around 2,562 complaints were filed against digital lending apps on the RBI’s Sachet portal between January 2020 and March 2021.

What are the challenges associated with digital lending?

Repayment Challenge: Rising bad loans in the retail segment could be a big worry. 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 are the recommendations of the RBI Panel?

The panel proposed norms aimed at “orderly growth” of the digital lending sector. The panel recommended safeguard legislation and the creation of self-regulatory organizations that can verify and regulate the conduct of lending apps.

The panel also mentioned that responsible lending will remain a “distant goal” without customer awareness and watchful enforcement.

Source: This post is based on the article “Good and bad sides of digi lending, in 5 charts” published in Livemint on 14th December 2021.