The finest regulations: Customer as a lodestar in the digital lending space

For a country where 4 in 5 adults and 1 in 2 MSMEs still lack access to suitable and affordable formal credit, digital lending is the only way to meet their needs.

digital lending, fintech, Reserve Bank of India, RBI, online lending platforms, digital loans, MSME, NBFC
After months of eclectic Manthan, digital lending finally has a regulatory framework.

By Sugandh Saxena, CEO at Fintech Association for Consumer Empowerment (FACE)

After months of eclectic Manthan, digital lending finally has a regulatory framework. And what a solid and cogent foundation to usher into the future as we come together to rejoice 75 years of independence.

For a country where 4 in 5 adults (mostly low to medium-income customers) and 1 in 2 MSMEs still lack access to suitable and affordable formal credit, digital lending is the only way to meet their needs. The right ingredients of an increasingly digitized economy, young demographics, mobile/internet penetration, technology ecosystem, and supporting public policy and infrastructure have unleashed a digital lending revolution, if you will, transforming what customers expect in lending and how they interact in the lending process.

Unsurprisingly, in less than a decade, harnessing the potential of those ingredients and combining ingenuity, entrepreneurship and innovation, the fintech/digital lending models, have testified value proposition with success and scale. And no wonder, that digital lending is fast taking roots across products and market players including the most traditional Banks and NBFCs. Data points to the ever-increasing digitalization of products in personal, consumer, credit card, housing, auto and gold and MSME lending and loans intermediated through digital channels growing exponentially. If things move at this place, very soon most retail and MSME loans will become synonymous with ‘digital lending’.

In such an evolving context, regulation ticks all right chords.

First and foremost, by defining ‘digital lending as a remote and automated lending process, majorly by use of seamless digital technologies in customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service’ recognises the ubiquity of digital lending in future and embrace into the regulatory framework. This ensures future-proof, progressive and encompassing regulations, a bulwark against any regulatory arbitrage—the first principle.

The second element of the regulation is the sanctity of diverse digital lending business models serving customers through REs, DLAs, and LSPs. Fintech lending companies of various stripes have been a bellwether in taking risks and honing the models with a relentless credulity to meet customer needs. Most active players working in the regulated space were already working with/as DLAs and LSPs under the outsourcing and other arrangements permissible under the regulatory framework. Clearly spelt out the term of reference within which the REs, DLAs, and LSPs can function, brings a visible and predictable path to the industry play by the rules and significantly improves the ease of business.

Mandate and discipline in capturing customer’s economic profiles and submission of data to the credit bureau are critical measures to ensure that lenders have a comprehensive view of customers’ repayment capacity and indebtedness to offer a loan that is suitable to customers and doesn’t harm their well-being.

And lastly but more importantly the lodestar of regulation is customer empowerment with a focus on the correct information to the customer, who is the lender, what is the product and pricing, what data is being taken, why and how data will be used, control over data, usage, recovery practices. Alongside information, uniform regulatory standards on APR, disclosures, data permission, privacy and security ensure that customers taking digital lending loans through regulated entities, the customer now has assurance on critical parameters. This will improve customer trust in digital lending. Even more importantly, regulation will make customers aware of their rights and responsibility in digital lending and demand the same from their lenders. It will also help them to be aware of the illegal digital lending apps, which have exploited the app permissions and data to harm the customers.

Many customers, for the longest time, have had intimidating and hostile experiences in traditional lending to institutional and human biases. The most important aspect of digital lending, besides the efficiency and business model gains, is the dignified experience it provides to customers, respecting their needs, choice, time, convenience, and privacy.

Regulations are most clear-eyed and clear-headed in addressing the problems that had cropped up adversely impacting the customer protection and integrity and stability of the financial sector. Regulations have attempted a fine balance between prescription and principles of responsibilization, which is important to ensure adherence in letter and spirit. It empowers customers and entrusts the lenders to undertake responsibilities.

In the fullness of time, other critical aspects will become clear but for now, within these rules, digit lending will innovate and invigorate with ever greater clarity, focus and fortitude to achieve financial inclusion.

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