By Ajay Chaurasia, Vice President: Marketing, Product & Business, RupeeRedee
Digitalisation of lending processes has brought a series of benefits for banks and lenders with significant cost savings. It has supplemented data-driven decisions with improved customer experiences to help the challenging and complex process embark on a convenient approach after several financial headwinds – economic uncertainty, increased interest rates and widening accessibility gaps.
Lending firms addressed these headwinds by reinventing their business ecosystem adopting modern business models, new technologies, and improving margins. As the landscape continues to transform at an unprecedented pace, the Lending tech will emerge as the most lucrative Fintech sub-sector with a projected size of $270 Bn by 2030. The growth is attributed to various socio-economic factors – financial inclusivity and greater internet penetration across rural cities.
With a burgeoning number of customers availing digital loans and lenders entering the space, the Reserve Bank of India (RBI) is keenly involved in compelling the players to stay compliant. The central bank has recently announced several regulations to expand financial inclusivity for borrowers in safe cyberspace.
Protecting borrowers’ interest
To regulate the lending chain, RBI has ensured its visibility on the movement of money across the chain. Stipulating all loan disbursements in the bank account of the borrower to execute the repayment directly into the bank accounts of regulated entities established a clear audit trail. It prevents money laundering by eliminating the flow of money to pass through third-party pool accounts.
In the present digital lending scenario, Data is the engine oil that fuels the ecosystem’s growth. RBI has put together stringent data privacy practices for lenders and regulated entities in the space. The various checkpoints of data will help data privacy to go a long way in protecting borrowers’ sensitive information and building a more transparent
ecosystem.
Ban on accessing sensitive user data
Over the past few years, there has been a steep surge in the number of complaints against online lenders for their unethical recovery practices. It includes blackmailing the borrower with sensitive images or data obtained by gaining access to multiple windows in their phone. To fight against such unethical practices, the guidelines released by the central bank restricts the lending apps to access sensitive media or contact list of users to carry out genuine lending business.
Further obligating the apps to follow a code of conduct for ethical debt recovery will contribute to fair recovery practices in the country. For instance, the giant Google Play store has prohibited illegal loan apps and mandates other lending apps to provide relevant licensing documentation to prove their credibility in business.
Whitelisting of digital lending apps
To supplement the digital lending ecosystem with a legalised framework, the whitelisting of digital lending apps by RBI proved to be a significant step in protecting the borrowers’ interests. The infrastructure of app stores was brimming with unauthorised digital loan apps that have put the customers under severe financial risk. However, in a crackdown against illegal online lenders, the central government together with RBI has removed the apps that were not maintained and neither appointed by any neo-banking finance companies (NBFCs).
The stringent action protects the borrowers from unanticipated cyber risks as well as predatory behavior of online lenders for recovery. The central bank has also reviewed the instances that involved harassment of borrowers by digital lenders to ensure there is accountability in each step of recovery and collection.
Default Loss Guarantee
In a constantly shifting yet fragmented digital lending landscape, the orderly development of a credit delivery system is imperative. The RBI has come up with a Default Loss Guarantee (DLG) scheme that allows partnerships between regulated entities (banks and NBFCs) and Fintechs which guarantees compensation to REs for loss due to default up to a certain percentage of the loan portfolio.
The First Loss Default Guarantee (FLDG) Scheme has received the green signal from RBI which provides a regulatory framework and transparent discipline in the ecosystem. It will widen the scope of resolution of stressed assets which will instill harmony across entities.
Bottomline
The emergence of the digital lending market is backed by the agenda of expanding financial inclusivity. To increase the accessibility of loans for the underserved populace, the market needs more stringent norms and regulations to protect end consumers. India is one of the forerunners in shaping up the Fintech market and RBI’s guidelines addressing market conduct practices reassure the industry with safety, security and customer protection.