RBI panel pitches for strict regulation of digital loan apps

By: |
November 19, 2021 6:30 AM

The report said there were approximately 1,100 lending apps available for Indian Android users across over 80 application stores, of which 600 were illegal.

The RBI may provide general guidance and recognise such an SRO in respect of its regulated entities and their outsourced agents.The RBI may provide general guidance and recognise such an SRO in respect of its regulated entities and their outsourced agents.

A working group set up by the Reserve Bank of India (RBI) to review working of digital lending has made a case for stronger regulation of loan apps in its report. The recommendations range from subjecting digital lending apps (DLAs) to a verification process by a nodal agency to a separate legislation to prevent illegal digital lending activities.

The report said there were approximately 1,100 lending apps available for Indian Android users across over 80 application stores, of which 600 were illegal.

The group was constituted amid widespread complaints of harassment and unfair recovery practices by a host of lending apps which are virtually unregulated. While acknowledging the importance and role of technological advancements in the growth of the credit ecosystem, the report of the group, headed by RBI ED Jayant Kumar Dash, highlighted the risks arising out of recent developments. “… there have been unintended consequences on account of greater reliance on third-party lending service providers mis-selling to unsuspecting customers, concerns over breach of data privacy, unethical business conduct and illegitimate operations,” the report said.

One of the near-term recommendations, implementable in the next one year, is that a nodal agency be set up to primarily verify the technological credentials of DLAs of the balance sheet lenders and lending service providers (LSPs). It will also maintain a public register of the verified apps on its website. Styled as Digital India Trust Agency (DIGITA), the institution would be set up in consultation with stakeholders including regulators, industry participants, representative bodies and the government, the report said.

The report recommends that a self-regulatory organisation (SRO) covering DLAs and LSPs may be set up. The RBI may provide general guidance and recognise such an SRO in respect of its regulated entities and their outsourced agents. The government may also like to take similar action for digital lending business carried out by entities which are not regulated entities of the RBI.

Analogous to the central law on the banning of unregulated deposit schemes, the government could consider bringing through a legislation styled as “the Banning of Unregulated Lending Activities (BULA) Act” which would cover all entities not regulated and authorised by the RBI for undertaking lending business or entities not registered under any other law for specifically undertaking public lending business. “The recommended legislation may also define ‘public lending’ to bring clarity,” the group said in its report.

The group recommended that all loan servicing and repayments should be executed directly in a bank account of the balance sheet lender and disbursements should always be made into the bank account of the borrower.

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