There’s a lot about Beijing’s decades-long infrastructure push and investment-led growth that India wants to emulate. But when it comes to the consumer economy, aping China’s out-of-control digital lending boom is strictly off the policy agenda. The Reserve Bank of India’s recently released guidelines for app-based loans show a clear desire to rein in the industry after its pandemic-era excesses.
The RBI wants to strike a better balance between the ability of digital lending to democratize credit and its potential to suck people into a debt trap. The typical fixed cost of originating, servicing and collecting a loan is ₹5,000($60) for banks; for online platforms it’s a few hundred rupees, according to industry sources. As mobile internet becomes all-pervasive, apps can hawk small-ticket credit across the large country more efficiently than traditional lenders. That helps explain the eightfold expansion in loans disbursed by the homegrown Paytm in just the past year.
On the flip side, the RBI wants to end the more nefarious aspects of the industry, particularly related to invasion of privacy. The regulator says it’s stopping apps’ access to “mobile phone resources such as file and media, contact list, call logs, telephony functions” and other personal data that’s used to harass borrowers with impunity. Yes, lenders can ask for microphone and camera access to verify new customers, but the one-time privilege will require explicit consent of the borrower.
The Indian regulator also requires customers be informed upfront of the all-in interest cost, and get a look-in period in which they can change their mind. Digital apps will be paid by the regulated banks and nonbank finance firms that engage them as intermediaries, not by the borrowers.
Cleaning up the field
The Chinese regulators let banks outsource not just loan distribution but practically all credit-risk management to unregulated software and hardware firms. As a result, they pocketed bulk of the profit. By contrast, the RBI is signalling it would be more comfortable with interest margins split roughly down the middle — between banks that are providing the funds and the digital platforms originating loans and collecting payments. In case the firm behind the app guarantees some of the lender’s loss from a bad loan, the central bank’s rules on securitization of assets will apply. Basically, the RBI doesn’t want credit risk to grow in the shadows — where it has no control.
That’s altogether a more sensible approach. Some 1,100 lending apps proliferated in India at the peak of the pandemic-induced chaos, promising all kinds of quick credit and buy-now-pay-later arrangements. More than half of them were operating illegally, with many renting the balance sheets of local nonbank finance firms. Some of these fly-by-night operators disappeared after converting profits of at least $125 million into cryptocurrencies and transferring them into foreign wallets, according to media reports. The RBI’s guidelines would go some way toward cleaning up the field before it became a systemic risk.