Date: 05/09/2022

Relevance: GS-2: Important aspects of governance, transparency, and accountability, e-governance- applications, models, successes, limitations, and potential;

Key Phrases: Cooling-off Period, Annual Percentage Rate, Comprehensive Privacy Policy, Digital Lending Apps, Data Storage and Localisation, Instant Loan Disbursal, Greater Accessibility & Inclusion, Frictionless Customer Experience

Why in News?

• The Reserve Bank of India (RBI) has issued the “Guidelines on Digital Lending” for regulated entities/REs (banks and NBFCs) in a bid to protect consumers from the breach of data privacy, unfair business conduct, charging of exorbitant interest rates and unethical recovery practices by fintech players.

Key Highlights of the guidelines:

1. Loan Disbursal, Servicing, and Repayment:
   • REs shall ensure that all loan servicing, repayment, etc., shall be executed by the borrower directly in the RE’s bank account without any pass-through account/ pool account of any third party.
2. Cooling-off period:
   • Borrowers have to be given a cooling off/ look-up period to exit a digital loan by paying the principal and the proportionate annual percentage rate (APR) without any penalty during this period.
   • This period should not be less than three days for loans having tenor of seven days or more and one day for loans having tenor of less than seven days.
3. Access to phone data:
   • REs have to ensure that any collection of data by their digital lending apps (DLAs) and their lending service providers (LSPs) is need-based and with the prior and explicit consent of the borrower having an audit trail.
   • DLAs cannot access the borrower’s mobile phone resources and also can’t automatically increase the credit limit.
4. Comprehensive privacy policy:
   • REs have to provide borrowers with an option to give or deny consent for the use of specific data, restrict disclosure to third parties, data retention, revoke consent already granted to collect personal data and if required, make the app delete/ forget the data.
   • Also, DLAs have to desist from accessing mobile phone resources like files and media, contact lists, call logs, telephony functions, etc.
   • A one-time access can be taken for camera, microphone, location or any other facility necessary for the purpose of on-boarding/ KYC requirements only, with the explicit consent of the borrower.
5. Creditworthiness:
   • REs have been asked to capture the economic profile of the borrowers covering age, occupation, income, etc., before extending any loan over their own DLAs and/or through LSPs, with a view to assessing the borrower’s creditworthiness in an auditable way.
6. Data storage and localisation:
   • The responsibility regarding data privacy and security of the customer’s personal information will be that of the REs, which have also been directed to ensure that all data is stored only in servers located within India.

What is the rationale behind these guidelines?

• While digital credit disbursal has seen a surge bringing in a multitude of benefits including reducing costs for banks, the threat of illegal and unsecured lending apps has also increased multifold and therefore, requires the attention of regulators.
• The exponential growth of digital lenders has resulted in growing incidents of illegal entities deceiving innocent customers in need of small loans.
• These entities charge exorbitant interest rates, harass customers upon delay or non-payment of loans and misuse customer data.
• They are not registered as banking or non-banking finance companies and are far from regulation.
• The heavy job losses and financial emergencies during the pandemic drove several customers to illegal digital lenders, resulting in irrevocable damage to credit scores and lives.

What is digital lending?

• Digital Lending involves lending through web platforms or mobile apps, utilizing technology for authentication and credit evaluation.
• It enables potential borrowers to apply for loan products from any internet-capable device from any worldwide location.

What are the advantages of digital lending?

1. Instant loan disbursal: Digitalising the entire loan disbursal process, from loan application to credit assessment, has helped digital lenders to reduce turnaround time. Additionally, collaboration in the financial ecosystem to avail real-time KYC has significantly reduced the time lost in customer authentication.
2. Greater accessibility & inclusion: Customers are often excluded from the formal ambit of financial services due to lack of collateral, decent credit score or being new to credit. As a result, MSMEs, rural populace and low-income groups fall prey to informal moneylenders and loan sharks. New-age fintech companies are bridging this credit gap for underserved and unbankable populations by building a robust digital lending ecosystem.
3. Frictionless customer experience: Digital lending apps are built to simplify the time-consuming and inaccessible lending process through physical lending process making the lending process frictionless, accessible and inclusive.
4. Less time consumption: A business with financial and other essential data accessible digitally has a better chance of getting a digital loan.
5. Reduced costing: Since everything is online, the gap between business and digital lenders gets lessened. It also means the digital lender does not have to invest in physical or other infrastructure. It becomes a cost-saving factor for lenders. This, in turn, helps them avail any monetary or other benefits to their customers and businesses get better service.
6. Opportunities for new businesses: The digital lenders rely on a different set of credit scoring processes. It can make digital lending a good option for businesses with fresh ideas and proper planning to succeed but fall short on traditional credit scores. This credit scoring technique used 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, Indian businesses can look forward to technological advancements like AI algorithms enabling digital lenders to reach out for every kind of financing.
• With services such as video-KYC, Aadhaar-based KYC, and websites and applications with cutting-edge functionalities, loan application procedures will become more efficient and less cumbersome.
• Additionally, the traditional credit underwriting procedure will undergo a radical transformation.
• With the technology that enables alternative credit scoring, lenders can extend credit to a greater number of individuals, thereby advancing the cause of financial inclusion.
• The financial lending institutions are working to avail digital lending for small, medium and large enterprises.

Conclusion:

• The benefits of digital lending far outweigh the banes. Therefore, the digital lending can become the new norm of credit disbursal to the underserved sections of society, provided they are closely regulated and consumers practice prudence.
• Underpinned by the government, regulated by the RBI and embraced by the customers, digital lending can pave the way to financial inclusion for even the bottom of the pyramid.

Source: Hindu BL

Mains Question:

Q. Underpinned by the government, regulated by the RBI and embraced by the customers, digital lending can pave the way to financial inclusion for even the bottom of the pyramid. Critically examine. (250 words).