RBI released report of Working Group on Digital Lending:

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Why in the news?

Recently, the Reserve Bank of India (RBI) Working Group (WG) Committee has made recommendations pertaining to Digital Lending, including a separate legislation to prevent illegal digital lending activities.

Key points:

• 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 Non-Banking Financial Companies (NBFCs), a 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.

Proposals:

• The WG suggested setting up a nodal agency in consultation with stakeholders to verify the technological credentials of the Digital Lending Apps (DLAs) of the balance sheet lenders and Lending Service Providers (LSPs) operating in the digital lending ecosystem.
• A separate legislation should be enacted to oversee such lending.
• To set up a Self-Regulatory Organisation (SRO) covering the participants in the digital lending ecosystem.
• Disbursement of loans should be directly into bank accounts of borrowers.
• The maintenance of a ‘negative list’ of lending service providers by the proposed SRO.
• All data collection must require the prior consent of borrowers and come ‘with verifiable audit trails’ and the data itself ought to be stored locally.

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 helps in creating financial inclusion. It helps to meet the unmet credit need, in the microenterprise and low-income consumer segment in India.

Why need digital lending?

• Digital lending has the potential to make access to financial products and services more fair, efficient and inclusive.
• A balanced approach needs to be followed so that the regulatory framework supports innovation while ensuring data security, privacy, confidentiality and consumer protection.
• Financial Inclusion: Digital lending is a powerful tool that can be used for financial inclusion. With new innovations underway, digital lending has enabled many Financial Service Providers a way to offer much better products to the masses at a much faster rate which is even more cost-efficient.
• Time Saving: It decreases time spent on working loan applications in-branch. Digital lending platforms have also been known to cut overhead costs by 30-50%.

Associated Challenges:

• The digital lending ecosystem is still evolving and presents a patchy picture.
• They charge excessive rates of interest and additional hidden charges.
• They adopt unacceptable and high-handed recovery methods.
• They misuse agreements to access data on mobile phones of borrowers.

What are the steps taken by RBI in this regard ?  

• Non-Banking Financial Companies (NBFCs) and banks need to state the names of online platforms they are working with.
• RBI has also mandated that digital lending platforms which are used on behalf of Banks and NBFCs should disclose the name of the Bank(s) or NBFC(s) upfront to the customers.
• The central bank had also asked lending apps to issue a sanction letter to the borrower on the letter head of the bank/ NBFC concerned before the execution of the loan agreement.