More digital lenders are expected to land up on the Reserve Bank of India’s doorstep to ask for an NBFC registration certificate as the Google’s policies for hosting lending applications on its Play Store will tighten further, say experts.
In April, Google updated its personal loans policy that said access to the smartphone’s storage, contacts, location history, phone numbers, photographs or videos will now be restricted to the applications that offer personal loans. The new policy will take effect from May 31.
“Google Play Store’s tightening of rules for digital lending applications will push more lending service providers to apply for an NBFC licence. This will increase compliance costs for these digital lenders,” said Nageen Kommu, founder and chief executive officer, Digitap.AI.
“We may also see a trend where the larger fintechs look to acquire NBFCs,” he added.
Additionally, the applications need to clearly disclose important information about their loans, including minimum and maximum periods of repayment, interest rates and other charges.
Earlier, Google had revised its Play Store development programme policy for financial services applications, wherein applications are required to complete a declaration form confirming that they are licensed by the Reserve Bank of India (RBI) to provide personal loans and submit a copy of the licence. Alternatively, these applications must confirm that they only provide a platform to facilitate money lending by licensed lenders.
Recently, Google has disclosed that it has removed more than 3,500 personal loan applications in 2022 from the Play Store for flouting norms.
Fintech Association for Consumer Empowerment (FACE) chief executive officer Sugandh Saxena sees the tightening of norms as much-needed as the presence of unscrupulous lending applications hosted on the store are a danger to the digital lending ecosystem.
“The new policy might be challenging for some digital lenders who have not been adhering to fair lending practices or who have been taking advantage of borrowers,” said Mahesh Shukla, chief executive officer and founder, PayMe.
He added that this could result in some digital lenders choosing to pursue an NBFC licence as they would then be subject to regulations by the Reserve Bank of India, which could improve transparency and accountability in the industry.
The rush among digital lenders to get the NBFC tag could be accentuated by fact that Android phones are widely used in India, hence, removal from the Google Play Store might lead to revenue loss for entities that own these digital lending applications.
“Having an NBFC licence ensures that the regulated entity comes under the purview of the RBI. Typically, the parent company owns a fintech arm as well as a wholly-owned NBFC arm,” said Aditya Kumar, co-founder and chief executive officer of NIRO.
However, Kumar notes that owning a regulated entity does not necessarily mean that the parent does all or any of their business through that entity. Here, the group company can choose to do the entirety of their business through the financial technology arm.
For instance, non-bank lender KrazyBee Services offers unsecured personal loans through its group company Finnovation Tech Solutions. But the loans are originated by financial technology platform KreditBee.
Balance Hero India has an NBFC arm True Credits as well as mobile application True Balance.
But increasingly financial technology companies have now been moving their lending businesses to the NBFC subsidiary and are undertaking co-lending with partners like banks and traditional non-bank lenders, say experts.
According to the central bank’s norms, an entity must own funds of a minimum of Rs 10 crore to be eligible for an NBFC registration certificate.
A financial technology company with an NBFC licence operates similarly to a traditional NBFC in that both provide financial services such as loans and credit facilities. But the primary difference is in the mode of operation.
While traditional NBFCs may have a wider range of services and an established market presence, their processes are typically less technology-focused than those of fintech NBFCs, which heavily rely on digital platforms and data analytics for their operations, say experts.
NBFCs are required to submit compliance reports to the RBI on a periodic basis.
While large and well-capitalised fintechs like PhonePe and BharatPe have sought to acquire NBFCs to capitalise on the strong demand for credit, their smaller counterparts face an uphill battle.
“There is going to be a huge compliance cost. If you are a serious player, that is an investment to make sure that your operations are compliant and your processes are sustainable as your company grows,” said Anil Pinapala, chief executive officer of Vivifi India Finance.