DIGITAL LENDING
Why In News?
- Recently there has been many frauds related to digital lending in the country thus RBI has released an advisory on digital lending apps
- RBI has asked individuals plus small businesses not to fall prey to the growing number of unauthorised digital lending platforms and mobile applications to get quicker loans.
- The Working group is constituted by RBI to study all aspects of digital lending activities in the regulated financial sector as well as by unregulated players.
- In India’s its market has seen a significant rise over the years. Its value increased from USD 33 billion in FY15 to USD 150 billion in FY20 and is expected to hit the USD 350-billion mark by FY23.
Functions Of The Working Group
- Evaluate its activities and assess the penetration and standards of outsourced digital lending activities in RBI regulated entities;
- Identify the risks posed by unregulated digital lending to financial stability, regulated entities and consumers;
- Suggest regulatory changes to promote orderly growth of digital lending;
- To find measures for expansion of specific regulatory or statutory perimeter and suggest the role of various regulatory and government agencies;
- Recommend a robust fair practices code for digital lending players.
- The group will submit its report within three months
What Is Digital Lending?
- It is the process of offering loans that are applied for, disbursed, and managed through digital channels, in which lenders use digitized data to inform credit decisions and build intelligent customer engagement.
- Banks have launched their own independent digital lending platforms to tap in its market by leveraging existing capabilities in traditional lending.
Benefits Of Digital Lending
- Digitization of the lending process brings a number of powerful benefits for banks, including better decisions, improved customer experience, and significant cost savings.
- It helps in creating financial inclusion. It helps to meet the unmet credit need, in the microenterprise and low-income consumer segment in India.
- It helps to reduce borrowing from informal channels through informal borrowings. It also simplifies the process of borrowing.
- It is a Time-Saving process as it saves time spent uselessly in banks. Its platforms have also been known to cut overhead costs by 30-50%.
Challenges
- Unauthorised digital lenders: There are cases about individuals and small businesses falling prey to a growing number of unauthorised digital lending platforms/mobile apps.
- Over-indebtedness and NPA: Taking out multiple simultaneous loans due to ease of access, limited or no evaluation of capacity to repay, limited customer understanding, could lead to over-indebtedness of consumers and NPA of lenders.
- High interest rates and aggressive collection: Unauthorised digital lending platforms are charging excessive rates of interest and high-handed recovery methods.
- Data privacy: There are concerns raised about misuse of agreements to access data on the mobile phones of the borrowers by digital lending platforms.
Working Process Of Digital Lending
Need for regulation
- It has the potential to make access to financial products and services more fair, efficient and inclusive.
- From a peripheral supporting role a few years ago, FinTech-led innovation is now at the core of the design, pricing and delivery of financial products and services.
- While penetration of digital methods in the financial sector is a welcome development, the benefits and certain downside risks are often interwoven.
- A balanced approach needs to be followed so that the regulatory framework supports innovation while ensuring data security, privacy, confidentiality and consumer protection.
Government efforts
- National Lending Corporation (NLC): An umbrella body NLC focussed on regulation over lending on line of the National Payments Corporation of India (NPCI) needs to be formed under the oversight of RBI.
- Use of technology: Application of artificial intelligence, machine learning, and blockchain in the lending space should be increased to evaluate capacity of consumers to overcome problem of Over-indebtedness and NPA.
- Financial literacy: It is vital to make aware consumers about frauds by unauthorised digital lenders and understand its ecosystem well.
- Data protection: There must be clear guidelines to ensure data security, privacy and confidentiality of consumers.
- Code of conduct: Digital lenders should proactively develop and commit to a code of conduct that outlines the principles of integrity, transparency and consumer protection, with clear standards of disclosure and grievance redressal.
ALSO READ: https://www.brainyias.com/code-of-conduct/
