From UPSC perspective, the following things are important :
Prelims level : Digital lending in India
Mains level : Need for regulation of Digital Lending
A Reserve Bank of India (RBI) Working Group (WG) on digital lending has recommended separate legislation to oversee such lending as well as a nodal agency to vet the Digital Lending Apps.
- Digital lending is the process of availing credit online.
- Its increased popularity amongst new-age lenders can be attributed to expanding smartphone penetration, credit range flexibility, and speedy online transactions.
Significance of Digital Lending
India has a huge growth potential when it comes to the Digital Lending landscape:
- Alternate source of finance: Digital lending is mostly preferred by those who are generally not able to avail any credit through the formal sources of finance, like banks.
- Lender of the last resort: Digital lending is mostly preferred by those who are generally not able to avail any credit through the formal sources of finance, like banks.
- Financial inclusion: Digital lending is a powerful tool that can be used for financial inclusion.
- Cost-efficient lending: With new innovations underway, digital lending offers much better products to the masses at a much faster rate which is even more cost-efficient.
- Exception for red-tapism: Online lending has played a pivotal role in evading cumbersome red-tapism usually involved while availing loans offline in a traditional setting.
- Preference by MSMEs: The online lending platforms have gained massive popularity among MSMEs post-Covid as they were unable to secure finance through traditional lending.
- Easy onboarding: The quick turnaround time and onboarding, easy KYC, as well as disbursement within minutes have attracted the cash-crunched MSMEs towards these digital routes to secure credit.
Issues with Digital Lending
- No business model: There are many gaps that are existent in this model of digital lending like any new business operation.
- High interest: Unauthorised lenders provided credit to customers without any collateral and at exorbitant rates coupled with unachievable deadlines to pay off these humongous debts.
- Coercing and harassment for recovery: Resultantly, borrowers were coerced by the lenders to recollect when they were unable to pay off these debts. We see many cases of suicides due to such harassment.
Key recommendations by RBI
- Self-Regulation: RBI has mooted a Self-Regulatory Organisation for participants in the digital lending ecosystem.
- Developing a Baseline Technology: Development of certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions.
- Direct loan disbursement: Disbursement of loans directly into the bank accounts of borrowers; disbursement and servicing of loans only through bank accounts of the digital lenders.
- Data collection: With the prior and explicit consent of borrowers with verifiable audit trails.
- Standardized code of conduct: for recovery to be framed by the proposed SRO in consultation with RBI.
- There is a growing need for regulation in this space or unauthorized players like pointed out above will keep popping up.
- Stringent provisions must be formulated which can be enforceable legally.
- Regulation must be enforced in this industry soon to ensure consumer trust remains unfettered.