It has been clear for some time now that the operational practices of some of the digital lending apps could prove to be detrimental to financial entities and customers. For instance, as part of the BNPL—buy now pay later—product, credit lines were being added to the wallets of customers without them being aware of it.
Against this backdrop, the Reserve Bank of India’s first set of rules on digital lending are clearly aimed at regulating fintechs and minimising risks to the balance sheets of banks and non-banking financial companies. The measures are justified because it is important to set out some ground rules on the basis of which all players build their business models. In the process, errant loan apps should be weeded out. The rules mandate that loan disbursals must be made into the customer’s bank account and repayments too must flow into the same account. This will ensure that credit flows are tracked.
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Allowing funds to be parked in pre-paid instruments (PPIs), many of which may be unregulated entities, could lead to the money being lost altogether. In fact, the central bank insists that all loans, whether to individuals or merchants, must be reported to the credit bureaus. RBI is also looking out for customers by trying to ensure that loans and fees are priced transparently and that the annualised cost of the loan is made clear. Borrowers’ credit limits cannot be raised without their knowledge and any fees to be paid to the loans service providers (LSP) would be paid directly by the banks and not the customers. Indeed, customers must be charged proper rates of interest. Also, increasing their borrowing limits, without informing them or the ultimate lender, which could be a bank or an NBFC, is both an unfair and dangerous trend. Again, RBI has said that any data collected by digital lending apps should be minimal, need-based and with the consent of the customer, and apps cannot access mobile phone resources such as contact lists and call logs.
While this might seem harsh in the age of technology, fintechs can’t simply be gathering data while running an agency. In fact, after the rules come into effect, more fintechs might apply for NBFC licences, and come under the regulator’s purview. RBI is right in disallowing players to simply ‘borrow a balance sheet’, remain unregulated and not have any skin in the game. In fact, given how so many NBFCs have gone under, some amount of caution and regulation is called for. If fintechs believe the compliance is too onerous, they must shut shop. There is no final word from RBI on first-loss default guarantee (FLDG), although it has accepted the recommendation in principle. The draft guidelines had barred FLDG by a non-regulated entity. While the proposition sounds risky, banks and NBFCs should be permitted to use their judgement, within some prescribed limits. The point is that while some of the rules might seem limiting, the regulator can ease the rules as and when it believes it has a firmer grip on the ecosystem. So far, RBI has sounded reluctant to usher in stand-alone digital banks, possibly because it wants a better understanding about what their entry could imply. While it might seem like the central bank is dragging its feet on the issue, it is better to be safe than sorry.