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Home / Opinion / Views /  India needs a shake-up in digital lending

In July this year when the Reserve Bank of India (RBI) forced India’s rapidly growing fintech industry to ease the accelerator by banning firms offering pre-paid instruments, or non-bank digital wallets and pre-paid cards, from providing credit lines on fintech platforms, there appeared to be a pushback. India, like a few other markets, now has a thriving fintech industry with a few firms in the list of unicorns and attracting funding including global capital.

But India’s regulator has not blinked. Rather, it has chosen to focus more on consumer protection, given its concerns on a range of issues such as mis-selling, engagement of third parties, unfair business conduct, risk of breach of data privacy, exorbitant lending rates and unethical lending practices. The new proposed rules for digital lending, which the RBI has just brought out, clearly reflect the central bank's belief that the social impact of a new technology should be fully comprehended by all stakeholders. That, it reckons, would be the best way to slow down the process of change, allowing consumers to adopt the new offerings with improved understanding of the associated risks.

The new rules, some of which will require changes to law by the government, will make it mandatory for fintech firms to execute all loan disbursals and repayments between the bank accounts of borrowers and regulated entities instead of a pass-through involving a third party, provide a standardised key fact statement to the borrower before executing the loan agreement; and list out the all-inclusive cost of the digital loan to the borrower. This signals greater transparency besides providing more options to consumers as in a cooling-off period during which a borrower can exit a digital loan without a penalty by paying the principal and the annual percentage rate or interest and to accept or deny consent for specific data including revoking previously granted approval.

Digital lending firms will now have to obtain the consent of a borrower before offering an automatic increase in credit limit and also for use of specific data. The harvesting and use of data by digital firms or breach of privacy has been a source of concern not just here but in many other markets. It is by using such data including phone usage that some of these firms base their lending decisions. The RBI has stipulated that there ought to be audit trails. That sounds fine, but like in developed markets, the penalties should be far more stringent for breach of data privacy and embodied in law.

India’s fintech industry will have a bone to pick with the regulator for sure. But the regulatory stance on this area isn’t at much variance with many other jurisdictions. China cracked down much earlier on the Buy Now Pay Later or BNPL segment. The UK regulator after analysing the contracts of four top firms in this business found potential harm to consumers, prompting these firms to pedal back and address these concerns. The message that the Financial Conduct Authority sought to convey was that being proactive and getting involved early helps deliver positive changes.

What could happen over time is that there's likely to be a shake-up in the digital lending business here with the stronger ones having robust models edging ahead. India needs these platforms driven by technology and innovation to not just cater to a vast unbanked set outside of the traditional brick-and-mortar banks that lack a credit history or scores but also to challenge and shake up these banks.

Fintechs offer the promise of financial inclusion and bringing into their fold the gig economy and small entrepreneurs. If they conform to the new rules of engagement and gain the trust of the regulator and the government, it could open up new doors like Internet-only banks and other new models of banking. The regulator will also have to be mindful of gaming by borrowers too as has been the case in non-digital lending.

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