Mumbai Nearly seven months after introducing the digital lending norms, the banking regulator is asking banks to furnish a report on the agreements they have with fintech outfits. According to highly placed sources, the purpose of this report to pinpoint certain critical aspects of the contracts, such as which entity has the ultimate ownership of the customer, whether the full responsibility of assessing the customer credit worthiness lies with the bank, fintech, or split between the two, and who is ultimately bearing the credit risk of the contract. In short, the objective is to ascertain whether the bank has full control of the underwriting process before onboarding the customer and would bear the credit risk in full, in case of defaults.
“Though not like past NPA level, but the book sourced though fintechs are still not performing exactly like how the in-house sourced book of the bank is performing in terms of credit quality. Hence the RBI wanted to get a hold of who has ultimate underwriting and risk management responsibilities on portfolio sourced though fintechs,” said a highly placed source aware of the matter. Sourcing loans through fintechs is particularly popular for payday loans, personal loans and credit card. Of the three, credit cards, in particular, are gaining traction, especially among smaller banks. Further with some of the fintechs operating in the sourcing side are yet to establish their credentials and don’t have an operational history or proven track record yet to justify their domain expertise. Sources say that this is another factor which the regulator isn’t very comfortable with.
The Reserve Bank of India introduced guidelines for digital lending in August last year. These norms were targeted at homogenizing guidelines in the digital lending space, where banks collaborate with fintechs. While the regulations seem to have improved the level of transparency and data protection from a customer standpoint, with respect to underwriting credit risk, it still seems to be bit of a grey area. To put things in context, while the industry was anticipating well coded guidelines on whether banks and fintechs (operating through licensed NBFCs) can have an FLDG or first loss default guarantee arrangements, the August 2022 circular remained open ended on this aspect. While as an initial reaction to the circular, some banks suspended the sourcing contracts with fintechs, industry experts observe that partnerships with fintechs have increased significantly in the last six months. “Since it’s clearly the most cost effective customer acquisition mode, banks cannot stay away from such partnerships for long,” said a business head of a technology company.