Digital Lending Regulations: Call for responsible innovation | The Financial Express

Digital Lending Regulations: Call for responsible innovation

In the new digital-heavy normal, the rise of digital lending or fintech and its practices has prompted the government and RBI through its recent digital lending guidelines set the record straight.

Digital Lending Regulations: Call for responsible innovation
Digital lending assumed its role of providing tech-enabled solutions and seamless customer experience for providing financial products in the last 5 years.

By Vijay Dhingra, CLCO, Home Credit India

Regulation or Over-regulation stifles innovation – the popular discourse of any industry or stakeholder who is for innovation. However, in the new digital-heavy normal, the rise of digital lending or fintech and its practices has prompted the government and RBI through its recent digital lending guidelines set the record straight to the effect though innovations are surely welcome in this space, they cannot thrive or be allowed to operate at the cost of a regulation-free environment as it may stifle the ecosystem, compromise to compliances / disclosure and most importantly protection of consumer rights.

For a robust and holistic economic development, financial inclusion is imperative and has always been one of the prime agenda of the present government. India has the second-largest unbanked population with an estimated 190 million adults still without a bank account—majority being women. The problem is exacerbated in rural India, home to over 65 per cent of India’s population, where most remain outside the ambit of availability of formal credit. The lack of strong technology infrastructure in most parts of the country also presents a challenge to financial inclusion.

That is where, digital lending assumed its role of providing tech-enabled solutions and seamless customer experience for providing financial products in the last 5 years, creating a paradigm shift as to how the financial industry operates, especially in lending services. Change was the need of the hour, which resulted in the birth of numerous fintech start-ups and the era of digital lending.

The latest report on the Fintech industry by consulting firm Bain & Co. – India Fintech Report 2022, states that BNPL apps disbursed credit to over 15 million consumers in FY 21 as digital lending models including short-term loans offered by BNPL players have emerged as the preferred mode of consumer finance. According to media reports, the digital lending market is projected to grow from $100 billion in 2019 to over $350 billion in 2023.

However, as there exists a natural phenomenon according to which the areas which are not driven by any settled regulations, tend to create a mushrooming effect which can cause unwarranted adverse impacts on the ecosystem. With the advent innumerable lending mobile applications, entities apart from banks and financial institutions recognised RBI, started to foray into the lending space and gradually things were appearing to be directionally getting out of control – starting from the flow of consumer complaints with respect to exorbitant charges, lack to transparency, harassment during collections, data privacy & security breaches and amplified credit hungry behavior of new-age customer. As a result of this, the substantial efforts put in by RBI and entities regulated by it over the years to operate in a regulated environment were getting compromised.

All this not only sought the attention of RBI but also resulted in intervention by judiciary and GOI. This resulted in the constitution of a working group by the RBI to understand and look into the prevailing digital lending practices. The study revealed the existence of over 1100 illegal digital lending apps and furthermore the understanding that fintech firms are just intermediaries or direct selling associates (DSA) leveraging on the balance sheets of banks or NBFCs at the backend. Furthermore, in follow-up to this, RBI has come up with guidelines stating that regulated entities are the real lenders who should directly interact with borrowers instead of fintech platforms who are simply intermediaries. Through this, RBI has upheld the empowerment of regulated entities and gave much awaited recognition to the concept of digital lending and its acceptability within acceptable regulations.

It also is likely to weed out entities, operating in a completely unregulated environment which could have caused irreparable damage to the financial ecosystem. The regulations are intended to be a win-win situation for financial entities as well as technology entities to harness respective skills & innovation in a collaborative manner while securing the financial ecosystem, protecting the interests of customers, seamless customer experience, mass reach, data security and last but not the least cost optimisation.

Some checks and balances

Indeed, the growth of the Fintechs and the digital means of conducting banking, as has been rightly pointed out by the RBI, cannot be completely unregulated. The RBI has come out with some key guidelines like the requirement of loan disbursal apps and credit aggregators to properly display a link to the partner bank or non-banking finance company (NBFC). The RBI has recently also spoken about “process of green-lighting (whitelisting) and due-diligence” for the fintech and new-age financial companies.

All in all, while a reasonable level of check and balance is required for digital lending and fintech, the regulatory authorities must also take into consideration that the guidelines support the growth of the modern banking players in a way which allow these entities to operate under this new regulatory environment with optimised costs, enhanced customer experience, extended reach thereby support the financial inclusion initiative of Government of India. However, it is also equally important that innovations are evaluated to ensure that the eventual outcome of such innovation doesn’t disrupt the existing ecosystem and are directed towards making things better.

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

First published on: 31-10-2022 at 20:43 IST