Digital lending: RBI panel pitches for tougher norms, separate law

A working group set up by the Reserve Bank of India (RBI) has proposed stringent norms for digital lenders, including a separate legislation to prevent illegal digital lending activities.

According to the committee, digital lending apps should be subjected to a verification process by a nodal agency to be set up in consultation with stakeholders. It also proposed the setting up of a Self-Regulatory Organisation (SRO) covering the participants in the digital lending ecosystem.

It proposed that disbursement of loans should be directly into the bank accounts of borrowers. “Disbursement and servicing of loans only through bank accounts of the digital lenders. Data collection with prior and explicit consent of borrowers with verifiable audit trails. All data to be stored in servers located in India,” the committee said.

The RBI says lending through digital mode relative to physical mode is still at a nascent stage in the case of banks (Rs 1.12 lakh crore via digital mode against Rs 53.08 lakh crore through the physical mode) whereas for NBFCs, higher proportion of lending (Rs 0.23 lakh crore via digital mode against Rs 1.93 lakh crore through the physical mode) is happening through digital mode.

The committee said algorithmic features used in digital lending to be documented should ensure necessary transparency. “Each digital lender will have to provide a key fact statement in a standardised format including the annual percentage rate. The use of unsolicited commercial communications for digital loans to be governed by a code of conduct to be put in place by the proposed SRO,” it said. It also proposed the maintenance of a ‘negative list’ of lending service providers by the proposed SRO. In India, digital lending ecosystem is still evolving and presents a patchy picture. While banks have been increasingly adopting innovative approaches in digital processes, NBFCs have been at the forefront of partnered digital lending.

The RBI constituted a Working Group (WG) on digital lending including lending through online platforms and mobile apps on January 13, 2021, with Jayant Kumar Dash, Executive Director, RBI as the Chairman. The panel was set up in the backdrop of business conduct and customer protection concerns arising out of the spurt in digital lending activities.

The report’s thrust has been on enhancing customer protection and making the digital lending ecosystem safe and sound while encouraging innovation, it said. Private sector banks and NBFCs with 55 per cent and 30 per cent share respectively are the dominant entities in digital lending ecosystem. Also, share of NBFCs has increased from 6.3 per cent in 2017 to 30.3 per cent in 2020 indicating their increasing adoption of technological innovations.

Key proposals

*Digital lending apps should be subjected to a verification process by a nodal agency to be set up in consultation with stakeholders

*The working group proposed the setting up of a Self-Regulatory Organisation (SRO) covering the participants in the digital lending ecosystem

*Disbursement of loans should be directly into bank accounts of borrowers

*Maintenance of a ‘negative list’ of lending service providers by the proposed SRO