Financial Inclusion in India and Its Challenges

Digital lending


From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Digital lending and challenges

Digital lending has been on the rise in India. However, there are several concerns about the model. The article discusses these concerns and suggests the policy approach.

3 digital lending models

  • Presently, there are three digital-lending models, seen through the regulatory-approach lens:
  • 1) Bank/NBFC-owned digital platforms operating under the direct regulatory purview of RBI.
  • 2) Fintech companies’ proprietary digital platforms, working in partnership with banks/NBFCs.
  • Being mere intermediaries, these platforms are not required to seek any registration with RBI, and are only indirectly regulated through RBI’s outsourcing guidelines applicable to Banks/NBFCs.
  • 3) Peer-to-peer (P2P) lending platforms, which usually involve the otherwise unregulated retail lenders.
  • RBI has mandated such platforms to seek registration as NBFC-P2P; thus, they are directly regulated by RBI.

Issues with digital lending

  • The specific issues are unauthorised lenders, exorbitant rates of interest, use of coercive repayment methods, and non-consensual collection or use of user data.
  • These issues entail serious adverse implications for borrowers and have systemic implications, hampering the rise of legitimate fintech players.

Steps taken

  • With a view to curb such practices, RBI, in 2020, issued a notification to Banks/NBFCs mandating additional disclosures/compliances, and an advisory to borrowers warning them against such platforms.
  • Following the notification, Google removed several such loan apps from its PlayStore.
  • The Digital Lenders’ Association of India (DLAI) also issued guidelines to help borrowers identify such unscrupulous platforms.
  • In the regulatory pipeline on this front is the report of the working group on digital lending, constituted by RBI in January 2021.

Framing effective policy solutions

  • Given the significant contribution of legitimate fintech players, it is important to ensure that any policy solutions to address such issues do not impede the growth of such players.
  • The key to this lies in adoption of light-touch regulation, along with the effective implementation of the already proposed regulatory initiatives.
  • For instance, the primary cause of the rising supply of unauthorised lending platforms is the existing credit information asymmetry that genuine lenders face in respect of small borrowers.
  • Here, operationalising and on-scale implementation of RBI’s proposed ‘Public Credit Registry’ and the ‘Open Credit Enablement Network’ (an infrastructure protocol enabling digital low cost lending to small borrowers through access of consented data) would lead to increased participation of legitimate players and curb proliferation of unauthorised lenders.
  • Another foundation for framing effective policy solutions lies in leveraging the interdependence and impact of each individual constituent of the digital lending ecosystem, on other constituents.
  • Apart from lenders/platforms/borrowers, these constituents also include the digital lending industry associations, consent managers and technology developers.
  • Regulators and industry associations working together can provide the necessary foundations for addressing these issues.
  • Other solutions spear-headed by industry associations could be to establish ‘certification system’ based maintenance of a repository of lending platforms for easy identification of genuine players.
  • Similarly, on the data protection aspect, a structural solution through coordinated efforts of various digital lending constituents is required.

Consider the question “Examine the factors aiding the growth of digital lending in India. What are the challenges the sector face? Suggest the measures to deal with these challenges.”


For the continued development of the Indian digital lending economy, it is important to implement policy solutions that adequately protect the borrowers from malpractices, while, at the same time, do not dampen innovation in this fast-evolving sector.


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