Freeing up. Timely move

The boost given by the Covid-19 pandemic to fintech adoption has enhanced financial inclusion, but the negative fallout has been the proliferation of lending through unregulated, or flimsily regulated digital lending apps or platforms. According to the Reserve Bank of India, of the 1,100 unique loan apps available on app stores, 600 apps are wholly beyond the scope of regulation. Complaints against these apps have also been mounting since last December over mis-selling, breach of data privacy, and illegal and unethical conduct. There is clearly a growing demand for these products, since the volume of digital loan disbursements has grown more than twelve fold between 2017 and 2020. But a laissez faire approach could erode the credibility of the financial services ecosystem. The RBI working group’s comprehensive review of these digital lenders and compilation of suggestions regarding the manner in which they need to be regulated is, therefore, timely.

The segregation of digital lenders into balance sheet lenders and lending service providers (LSPs) by the working group makes it easier to frame rules. Balance sheet lenders who carry the credit risk in their balance sheet and have to provide the capital for these loans, pose a higher systemic risk. The suggestion that balance sheet lending should be limited to entities regulated by RBI or those registered under any other regulatory authority, is therefore a good idea. To prevent regulatory arbitrage, the RBI should frame the rules for all balance sheet lenders, irrespective of the regulator with which they are registered. Along with this, an Act banning unregulated balance sheet lending activities will help check wrongdoers. Regulating LSPs is however more difficult since they do not carry the loan on their balance sheet but mainly help to connect the lender and the borrower. Peer-to-peer lending platforms, the so-called neo-banks and Buy Now Pay Later (BNPL) players that have been grouped in the category of LSPs can be controlled only if all the transactions conducted by them are captured by the regulator.

Many of these entities are unregulated and their transactions do not enter the mainstream banking database. The recommendation that all loan servicing, repayments and loan disbursements should be through the bank accounts without passing through any pool account, will help address this issue. A government notification clarifying the legality of BNPL loans will help protect small borrowers who typically borrow through these channels. Regulating this area without suppressing it altogether will be a delicate balancing act as digital lending could grow tremendously in size, becoming increasingly popular with the unbanked first-time borrowers. It meets a market need for loans that can be easily obtained, provided cheating and usury do not enter the picture. Innovation in this space should be encouraged. Including feedback from stakeholders while framing regulations is the best way to move ahead. An agency consisting of industry participants and regulators to rate digital lending apps for public use is a feasible idea.

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