RBI working group warns on digital lending by big tech players

What is the News?

A working group set up by the Reserve Bank of India (RBI) has proposed stricter norms for digital lenders. 

Background

RBI had constituted the working group on digital lending including lending through online platforms and mobile apps under the chairmanship of Jayant Kumar Dash, Executive Director, RBI.

The working group was set up in the backdrop of business conduct and customer protection concerns arising out of the increase in digital lending activities.

The working group has now submitted its recommendations.

What are the key recommendations of the working group?

Legislation to curb Digital Lending: The group has recommended a separate legislation to prevent illegal digital lending activities. 

Nodal Agency:  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.

Self-Regulation: RBI has mooted a Self-Regulatory Organisation for participants in the digital lending ecosystem.

Develop a Baseline Technology: Development of certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions.

Data collection: Data Collection should be done with the prior and explicit consent of borrowers with verifiable audit trails. All data should also be stored in servers located in India.

Neo-Banks: Neo-banks should be brought under the regulations of the RBI. 

Note: Neobanks are financial institutions that give customers a cheaper alternative to traditional banks. One can think of them as digital banks without any physical branches, offering services that traditional banks don’t, and doing so efficiently. In India, these firms don’t have a bank licence of their own but rely on bank partners to offer licensed services.

Pricing of Loans: RBI should establish standard definitions for the cost of digital short-term consumer credit as Annual Percent Rate (APR). 

Regulation of Third Party Service Providers: There are three players in the ecosystem: RBI-regulated entities; other regulated entities; and unregulated entities, including third-party service providers. The working group said the onus of subjecting third-party lending service providers to a standard protocol of business conduct would lie with the regulated entities, to which they are attached.

Source: This post is based on the following articles: 

• “RBI working group warns on digital lending by big tech players” published in Business Standard on 18th November 2021.
• “RBI proposes new law to regulate digital lending” published in TOI on 18th November 2021.
• “Dash-led Reserve Bank committee suggests regulating digital loan apps” published in Livemint on 18th November 2021.