The Reserve Bank of India (RBI) has constituted a working group on digital lending to study all aspects of digital lending activities in the regulated financial sector as well as by unregulated players.

NPAs are rising in India. And one may find some irritating ads and texts on our smartphones, which desperately wants to disburse easy loans (that too in a limited offer period)!

Digital Lending

• Digital lending is the process of offering loans that are applied for, disbursed, and managed through digital channels, in which lenders use digitized data to inform credit decisions and build customer engagement.
• It consists of lending through web platforms or mobile apps, by taking advantage of technology for authentication and credit assessment.

Why in news?

• The move comes in the backdrop of the three borrowers in Telangana committing suicide over alleged harassment by personnel of such digital lenders.
• There were many more complaining of being subjected to coercive methods after defaulting on repayments.

Why regulate Digital Lending?

• Digital lending has the potential to make access to financial products and services more fair, efficient and inclusive.
• From a peripheral supporting role a few years ago, FinTech-led innovation is now at the core of the design, pricing and delivery of financial products and services.
• While penetration of digital methods in the financial sector is a welcome development, the benefits and certain downside risks are often interwoven.
• A balanced approach needs to be followed so that the regulatory framework supports innovation while ensuring data security, privacy, confidentiality and consumer protection.

Risks associated

• A growing number of unauthorized digital lending platforms and mobile applications are threats to consumers.
• Such lenders charge excessive rates of interest and additional hidden charges.
• They adopt unacceptable and high-handed recovery methods and in turn misuse agreements to access data on mobile phones of borrowers.

What will the working group do?

• The RBI working group will evaluate digital lending activities and assess the penetration and standards of outsourced digital lending activities in RBI regulated entities.
• They would thus identify the risks posed by unregulated digital lending to financial stability, regulated entities and consumers; and suggest regulatory changes to promote orderly growth of digital lending.
• It will also recommend measures for expansion of specific regulatory or statutory perimeter and suggest the role of various regulatory and government agencies.
• It will also recommend a robust fair practices code for digital lending players.

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