Regulating fintech

The fintech companies which mushroomed in recent years have had a large role to play in helping retail borrowers tide over financial exigencies, especially during the pandemic. But many of these companies are operating beyond regulatory purview, have been using unethical and coercive tactics to collect dues and charge exorbitantly high rates of interests and fees. In this backdrop, the regulatory framework for digital lending framed by the Reserve Bank of India is welcome as it addresses the concerns of the borrowers in this segment. The framework strikes the right balance in allowing these digital lenders to continue operations, but under regulatory supervision. The central bank is laying down rules for regulated entities, including banks, and fintechs engaged by them, so that they can operate in a transparent manner with transactions routed through the banking system. Other regulators have been advised to frame similar regulations for entities not under RBI’s purview and the Centre’s intervention is recommended in controlling illegitimate lending activities of digital entities not under any regulatory supervision.  

By terming fintechs as direct service providers or DSPs, the regulations now give this category the official status of DSAs or direct selling agents, often the link between banks and customers in the traditional world. Any loan related transaction, whether execution of loan documents, disbursement, or repayment, is now mandated to be directly transacted between the borrower and the regulated entities. This ensures that money and the paper trail is not left with the intermediary or the DSP. In a bid to improve transparency and secure the trust of the customer, the regulations state that the cost of the transaction will now have to be borne by the regulated entity and like with any loan product, all-inclusive cost of the loan should be revealed to the customer. The room to charge exorbitant fees by fintechs is now set to disappear. The issue of customer’s credit score getting hurt without their knowledge is also effectively addressed. The RBI has accepted the working group committee’s recommendations to report all lending transactions done through DSPs to credit information bureau. Therefore, whether a customer is onboarded through a third party fintech app or directly by the bank, the onus of running a check on the customer’s credit worthiness fully vests with the regulated entity. This also addresses the issue of evergreening of loans, which this newspaper highlighted in a recent report. The issue of data privacy has also been comprehensively addressed. The RBI is insisting that data on transactions through the loan apps must be preserved within the country. Likewise, it is now stipulated that the app cannot collect customer-related data without customer consent and that data collected should be need-based. An audit trail of such data is also now necessary.  

The only concern is that the tighter framework curtails the activities of the digital service providers and many of them may even shut shop, thus closing the funding source of many retail borrowers. Also these fintechs were preferred by many due to the convenience, quick disbursement and faster processing.  Now the wait for credit can increase and will involve cumbersome paperwork. The central bank needs to see how it can provide alternative channels for providing fast-track loans to small-ticket borrowers so that their needs are also met.   

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