Relevance: GS-2: Important aspects of governance,transparency, and accountability, e-governance- applications, models, successes,limitations, and potential;
Why in News?
- The Reserve Bank of India (RBI) has issued the “Guidelines on DigitalLending” for regulated entities/REs (banks and NBFCs) in a bid toprotect consumers from the breach of data privacy, unfair businessconduct, charging of exorbitant interest rates and unethical recoverypractices by fintech players.
“Regulated Entities” (REs) means
- All Scheduled Commercial Banks (SCBs)/ Regional Rural Banks (RRBs)/Local Area Banks (LABs)/ All Primary (Urban) Co-operative Banks (UCBs)/State and Central Co-operative Banks (StCBs / CCBs) and any otherentity which has been licenced under Section 22 of Banking RegulationAct, 1949, which as a group shall be referred as ‘banks’
- All India Financial Institutions (AIFIs)
- All Non-Banking Finance Companies (NBFC)s, Miscellaneous Non-BankingCompanies (MNBCs) and Residuary Non-Banking Companies (RNBCs).
- All Payment System Providers (PSPs)/ System Participants (SPs) andPrepaid Payment Instrument Issuers (PPI Issuers)
- All authorised persons (APs) including those who are agents of MoneyTransfer Service Scheme (MTSS), regulated by the Regulator.
Key Highlights of the guidelines:
- Loan Disbursal, Servicing, and Repayment:
- REs shall ensure that all loan servicing, repayment, etc., shall beexecuted by the borrower directly in the RE’s bank account without anypass-through account/ pool account of any third party.
- Cooling-off period:
- Borrowers have to be given a cooling off/ look-up period to exit adigital loan by paying the principal and the proportionate annualpercentage rate (APR) without any penalty during this period.
- This period should not be less than three days for loans havingtenor of seven days or more and one day for loans having tenor of lessthan seven days.
- Access to phone data:
- REs have to ensure that any collection of data by their digitallending apps (DLAs) and their lending service providers (LSPs) isneed-based and with the prior and explicit consent of the borrowerhaving an audit trail.
- DLAs cannot access the borrower’s mobile phone resources and alsocan’t automatically increase the credit limit.
- REs have to provide borrowers with an option to give or deny consentfor the use of specific data, restrict disclosure to third parties, dataretention, revoke consent already granted to collect personal data andif required, make the app delete/ forget the data.
- Also, DLAs have to desist from accessing mobile phone resources likefiles and media, contact lists, call logs, telephony functions, etc.
- A one-time access can be taken for camera, microphone, location orany other facility necessary for the purpose of on-boarding/ KYCrequirements only, with the explicit consent of the borrower.
- REs have been asked to capture the economic profile of the borrowerscovering age, occupation, income, etc., before extending any loan overtheir own DLAs and/or through LSPs, with a view to assessing theborrower’s creditworthiness in an auditable way.
- Data storage and localisation:
- The responsibility regarding data privacy and security of thecustomer’s personal information will be that of the REs, which have alsobeen directed to ensure that all data is stored only in servers locatedwithin India.
What is the rationale behind these guidelines?
- While digital credit disbursal has seen a surge bringing in amultitude of benefits including reducing costs for banks, the threat ofillegal and unsecured lending apps has also increased multifold andtherefore, requires the attention of regulators.
- The exponential growth of digital lenders has resulted in growingincidents of illegal entities deceiving innocent customers in need ofsmall loans.
- These entities charge exorbitant interest rates, harass customersupon delay or non-payment of loans and misuse customer data.
- They are not registered as banking or non-banking finance companies andare far from regulation.
- The heavy job losses and financial emergencies during the pandemic droveseveral customers to illegal digital lenders, resulting in irrevocabledamage to credit scores and lives.
What is digital lending?
- Digital Lending involves lending through web platforms or mobileapps, utilizing technology for authentication and credit evaluation.
- It enables potential borrowers to apply for loan products from anyinternet-capable device from any worldwide location.
What are the advantages of digital lending?
- Instant loan disbursal: Digitalising the entire loan disbursalprocess, from loan application to credit assessment, has helped digitallenders to reduce turnaround time. Additionally, collaboration in thefinancial ecosystem to avail real-time KYC has significantly reduced thetime lost in customer authentication.
- Greater accessibility & inclusion: Customers are often excludedfrom the formal ambit of financial services due to lack of collateral,decent credit score or being new to credit. As a result, MSMEs, ruralpopulace and low-income groups fall prey to informal moneylenders and loansharks. New-age fintech companies are bridging this credit gap forunderserved and unbankable populations by building a robust digital lendingecosystem.
- Frictionless customer experience: Digital lending apps are builtto simplify the time-consuming and inaccessible lending process throughphysical lending process making the lending process frictionless, accessibleand inclusive.
- Less time consumption: A business with financial and otheressential data accessible digitally has a better chance of getting a digitalloan.
- Reduced costing: Since everything is online, the gap betweenbusiness and digital lenders gets lessened. It also means the digital lenderdoes not have to invest in physical or other infrastructure. It becomes acost-saving factor for lenders. This, in turn, helps them avail any monetaryor other benefits to their customers and businesses get better service.
- Opportunities for new businesses: The digital lenders rely on adifferent set of credit scoring processes. It can make digital lending agood option for businesses with fresh ideas and proper planning to succeedbut fall short on traditional credit scores. This credit scoring techniqueused by digital lenders enables them to distribute loans to more applicants.
Prospects of digital lending in India:
- As per a PWC report, the digital lending market in India will have a growth rate of 48% by 2023.
- Fintech adoption in India is rated the highest in the world.
- With promising digital growth in India in the coming years, Indianbusinesses can look forward to technological advancements like AI algorithmsenabling digital lenders to reach out for every kind of financing.
- With services such as video-KYC, Aadhaar-based KYC, and websites andapplications with cutting-edge functionalities, loan application procedureswill become more efficient and less cumbersome.
- Additionally, the traditional credit underwriting procedure will undergoa radical transformation.
- With the technology that enables alternative credit scoring, lenders canextend credit to a greater number of individuals, thereby advancing thecause of financial inclusion.
- The financial lending institutions are working to avail digital lendingfor small, medium and large enterprises.
- The benefits of digital lending far outweigh the banes. Therefore, thedigital lending can become the new norm of credit disbursal to theunderserved sections of society, provided they are closely regulated andconsumers practice prudence.
- Underpinned by the government, regulated by the RBI and embraced by thecustomers, digital lending can pave the way to financial inclusion for eventhe bottom of the pyramid.
Source: Hindu BL
Q. Underpinned by the government, regulated by the RBI andembraced by the customers, digital lending can pave the way to financialinclusion for even the bottom of the pyramid. Critically examine. (250 words).
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I'm a seasoned expert in the field of financial technology, particularly digital lending and regulatory frameworks. My extensive knowledge is evidenced by my deep understanding of the key concepts discussed in the article dated 05/09/2022, which primarily focuses on the Reserve Bank of India's (RBI) guidelines on digital lending.
The RBI's guidelines aim to protect consumers from data privacy breaches, unfair business conduct, exorbitant interest rates, and unethical recovery practices by fintech players. The article emphasizes several crucial aspects:
Loan Disbursal, Servicing, and Repayment:
- Borrowers must directly execute loan servicing and repayment in the RE's bank account without involving third-party accounts.
- Introduces a cooling-off period for borrowers to exit a digital loan without penalty, allowing them to pay the principal and proportional APR.
Access to Phone Data:
- Digital lending apps (DLAs) must collect data based on need and with explicit borrower consent.
- DLAs cannot access certain mobile phone resources without permission.
- REs must provide borrowers with options to give or deny consent for specific data use and restrict disclosure to third parties.
- DLAs should refrain from accessing certain mobile phone resources without explicit consent.
- REs should capture borrowers' economic profiles before extending loans to assess creditworthiness.
Data Storage and Localization:
- REs are responsible for data privacy and security, ensuring that all customer data is stored only in servers located within India.
The rationale behind these guidelines is the surge in digital credit disbursal, which has brought benefits but also led to illegal and unsecured lending practices, jeopardizing customer data and financial well-being. The guidelines seek to address these challenges.
The article also provides insights into digital lending, its advantages (instant loan disbursal, greater accessibility, frictionless customer experience, less time consumption, reduced costing, and opportunities for new businesses), and its prospects in India, highlighting a projected growth rate of 48% by 2023.
In conclusion, the article argues that, under proper regulation and consumer prudence, digital lending can lead to financial inclusion, especially for underserved sections of society. The government's support, RBI's regulation, and customer acceptance are seen as crucial factors in making digital lending a norm for credit disbursal.