Numerous poor practises in the digital lending ecosystem, such as unauthorised data usage and invasive recovery methods, caused the RBI to form a Working Group on Digital Lending, which has delivered its findings. While traditional lending is heavily regulated in India, internet lending is not. The research highlights the key point that the digital lending industry has progressed to the point where there is now a regulatory gap that needs to be filled by legislation that specifically handles digital lending challenges.
In the Indian fintech market, digital lending is developing at a blistering pace, second only to payments. However, the tremendous increase in consumption and innovation has created its own set of problems. The Reserve Bank of India (RBI) was obliged to act after several accusations of harassment and harsh recovery techniques employed by agents of many digital lending app platforms, even driving clients to suicide. The central banks working committee investigating how digital lending may be regulated discovered that 600 of the 1,100 lending applications examined on Indian app stores were in reality unlawful. The RBI working groups study advises using different measures to tighten down on digital lending applications that engage in fraud. However, there is a clear difference drawn throughout the study between regulated and unregulated companies, as well as what each of them can be authorised to accomplish. According to a Research and Markets analysis, India has emerged as the country with the greatest fintech adoption rate of 87 per cent by 2020, thanks to increased internet and smartphone penetration. NBFCs have been at the forefront of digital lending, with digital loans accounting for 53% of all loans issued between March and December 2020. As Indians have access to small-ticket credit, the digital lending industry is projected to increase, headed by the BNPL form of credit. With the market expected to grow, the industry feels now is the ideal moment to introduce laws and structure.
Some major conclusions emerge from studies, emphasising the need to step up the game in order to establish a more solid legal and regulatory framework that governs actors in the digital lending area. To that aim, the Group has proposed the establishment of a nodal agency to validate the technological credentials of balance sheet lenders (those that keep the loan and related credit risk on their balance sheet) and LSPs, as well as the maintenance of a public register of verified applications. DLAs are intended to limit balance sheet lending to regulated organisations or entities that are authorised to provide lending services. Under the first pillar of the three-pronged strategy, further ideas include the creation of a separate statute to prohibit unregulated lending operations and the formation of a Self-Regulatory Organization (SRO) to cover players in the digital lending arena. The Reserve Bank of India (RBI) has formed a working group to propose strict regulations for digital lenders, including a separate law to prohibit unlawful digital lending. Digital lending applications, according to the committee, should be subjected to a verification procedure by a nodal body that will be established in conjunction with stakeholders. It also advocated the formation of a Self-Regulatory Organization (SRO) to oversee the digital lending ecosystems members. It was recommended that loans be disbursed directly into the bank accounts of borrowers. "Only digital lenders bank accounts are used for loan disbursement and servicing. Data gathering with borrowers prior and express authorization, as well as audit trails that may be verified.
Many of these businesses are unlicensed, and their transactions arent recorded in the traditional banking system. This issue will be addressed by the proposal that all loan servicing, repayments, and disbursements be done through bank accounts rather than through a pool account. Small borrowers who normally borrow through these channels will be protected by a government announcement confirming the legality of BNPL loans. Regulating this sector without outright banning it will be a difficult balancing act, as digital lending has the potential to explode in popularity among unbanked first-time borrowers. It fills a market demand for loans that are simple to get, as long as there is no cheating or usury involved. This is an area where innovation should be promoted. The best approach to move forward is to incorporate stakeholder comments into the regulatory framework. To assess digital lending applications for public usage, an agency made up of industry participants and regulators was formed.