Lending to new-to-credit low-income borrowers has to operate as a ‘seller beware’ model.
The small-ticket lending space has seen a flurry of regulatory activity lately. The Reserve Bank of India (RBI) released regulations for microfinance. To address customer protection issues attributed to digital lending practices, RBI took multiple steps in quick succession. It barred the loading of prepaid instruments issued by non-banks through credit lines, notified recommendations of its working group on digital lending, and issued guidelines for it. These regulations define digital lending as “a remote and automated lending process, majorly by use of seamless digital technologies". At the same time, industry reports have pointed out that more than 60% of digital lending through platforms and mobile apps is to low-income, new-to-credit (NTC) borrowers. Lending to such customers using a remote and automated process is a potent mix. In our quest for innovation, we must pause to reflect on the why, what and how of such lending and its impact from a customer’s perspective. The well-established microfinance model (MF) has adopted digitalization in a calibrated way while maintaining a customer focus.