India needs a digital loan overhaul


In July this year, when the Reserve Bank of India (RBI) forced India’s rapidly growing fintech industry to ramp up the accelerator by banning companies offering prepaid instruments, or non-bank digital wallets and cards prepaid, to provide fintech lines of credit. platforms, there seemed to be a pushback. India, like a few other markets, now has a thriving fintech industry with a few companies in the unicorn list and attracting funding including global capital.

But the Indian regulator did not blink. Instead, it chose to focus more on consumer protection, given its concerns about a range of issues such as mis-selling, third-party engagement, unfair business conduct, risk of data privacy breach , exorbitant lending rates and unethical lending practices. The proposed new rules for digital lending, which the RBI has just published, clearly reflect the central bank’s belief that the social impact of new technology must be fully understood by all stakeholders. This, he believes, would be the best way to slow the process of change, allowing consumers to embrace new offerings with a better understanding of the associated risks.

The new rules, some of which will require changes to the law by the government, will require fintech companies to execute all loan disbursements and repayments between borrowers’ bank accounts and regulated entities instead of a transfer involving a third party , provide the borrower with a standardized statement of key facts before signing the loan agreement; and indicate the all-inclusive cost of the digital loan for the borrower. This signals greater transparency in addition to providing more options for consumers, such as in a cooling off period where a borrower can exit a digital loan without penalty by paying principal and annual percentage rate or interest. and accepting or denying consent for specific data, including revoking consent previously granted.

Digital credit companies will now need to obtain a borrower’s consent before offering an automatic credit limit increase and also for specific data usage. The collection and use of data by digital companies or the breach of privacy has been a cause for concern not only here, but in many other markets. It is using this data, including phone usage, that some of these companies base their lending decisions. The RBI has stipulated that there should be audit trails. Sounds good, but like in developed markets, penalties should be much stiffer for data privacy breaches and enshrined in law.

India’s fintech industry will certainly have its work cut out with the regulator. But the regulatory position in this area is not much different from that of many other jurisdictions. China cracked down on the Buy Now Pay Later or BNPL segment much earlier. The UK regulator, after analyzing the contracts of four major companies in this sector, discovered potential harm to consumers, prompting these companies to back down and address these concerns. The message that the Financial Conduct Authority sought to convey was that being proactive and getting involved early leads to positive change.

What could happen over time is that there will likely be a shake-up in the digital lending industry here, with the strongest having robust models moving forward. India needs these technology and innovation driven platforms not only to cater to a large unbanked set apart from traditional banks who have no credit history or scores, but also to challenge and shake up these banks.

Fintechs offer the promise of financial inclusion and the integration of the gig economy and small entrepreneurs. If they comply with the new rules of engagement and gain the trust of the regulator and the government, it could open new doors like internet-only banks and other new banking models. The regulator will also need to be mindful of borrower gambling, as has been the case with non-digital lending.

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