A committee set up by the central bank in January has suggested reining in digital loan apps through a mix of regulations, including setting up of a nodal agency to verify their credentials and legislative measures to prevent “illegal lending".
The thrust of the report is on enhancing customer protection and making the digital lending ecosystem safe while encouraging innovation. The Reserve Bank of India (RBI) had constituted a Working Group (WG) on digital lending including lending through online platforms and mobile apps headed by its executive director Jayant Kumar Dash.
The committee has suggested that a nodal agency be set up which will primarily verify the technological credentials of digital lending applications of balance sheet lenders and lending service providers (LSPs). It will also maintain a public register of the verified apps on its website.
As per the findings of the committee, there were approximately 1,100 lending apps available for Indian Android users across over 80 application stores between 1 January and 28 February. Of these, 600 are illegal, the panel found.
Another recommendation is to restrict balance sheet lending through digital lending apps to entities regulated and authorized by RBI or entities registered under any other law for specifically undertaking lending business.
“(The) central government may consider bringing in a legislation to prevent illegal lending activities by introducing the Banning of Unregulated Lending Activities Act," it said.
By constituting the committee, RBI had indicated its intent to look into the practices followed by the lending apps, even those that do not have a regulated entity like a non-bank financier linked to it. The covid-19 pandemic pushed people to the brink, forcing them to opt for quick loans at the click of a button from lending apps. However, when borrowers were unable to repay these loans, along with a back-breaking interest rate, these companies resorted to coercive recovery tactics.
The panel also recommended that a self-regulatory organisation (SRO) should be constituted covering the participants in the digital lending ecosystem. That apart, it suggested that all loan servicing and repayments should be executed directly in a bank account of the balance sheet lender and disbursements should always be made into the bank account of the borrower.
With regard to technology, the panel suggested that compliance with the prescribed baseline technology standards should be a precondition to offer digital lending. Each digital lending app should have publicly available policies regarding data storage, its usage and privacy; and data should be stored in servers in India.
“Data should be collected from the borrower or prospective borrower with prior information on the purpose, usage and implication of such data and with explicit consent of the borrower in an auditable way," it said.
When it comes to most of the lending apps, RBI lacks in regulatory powers since these companies are not registered as non-banking financial companies (NBFCs). The report of this committee also pointed out that supervisory enforcement has been made difficult by several factors. A majority of digital lending apps were neither regulated nor related to any regulated entity. That apart, non-bank lenders linked to certain apps were smaller ones, subject to light-touch supervision.
The committee said that the recommendations seek to protect the integrity of the system against entities that are not regulated and not authorized to carry out lending business. The onus of subjecting third-party lending service providers to a standard protocol of business conduct would lie with the regulated entities to whom they are attached.
The central bank on Thursday published the report on its website and sought comments from stakeholders and members of the public by 31 December through email.
Source; Livemint
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