A committee set up by the central bank has suggested limiting controversial digital lending applications through a mix of regulations, including creating a nodal agency to verify their credentials and legislation to prevent “illegal lending.” “.
The aim of the report is to improve customer protection and secure the digital lending ecosystem while encouraging innovation. The Reserve Bank of India (RBI) had set up a task force on digital lending, including online platforms and mobile apps, led by its executive director Jayant Kumar Dash in January after allegations of coercive collection tactics of receivables.
The committee, in its report, has now suggested the creation of a nodal agency that will benchmark digital applications of balance sheet lenders and loan service providers. It will also maintain a public registry of verified applications on its website.
According to the committee’s findings, around 1,100 loaner apps were available to Indian Android users. Of these, 600 were illegal, the panel found.
Another recommendation is to restrict lending on the balance sheet – where typically the loan is kept on the lender’s balance sheet – through loan applications to entities regulated and authorized by RBI or to those registered under any other law for specifically undertake lending activities.
“(The) central government could consider adopting legislation to prevent illegal lending activities by introducing the law on the prohibition of unregulated lending activities,” he said.
By setting up the committee, RBI had indicated its intention to examine the practices followed by certain loan applications. Controversy exploded against the backdrop of the Covid-19 pandemic when people who had been laid off were forced to search for quick loans, often at the click of a button from loan apps. However, when borrowers could not repay these loans, which carry exorbitant interest rates, companies resorted to coercive collection tactics.
The panel also recommended that a self-regulatory body be formed, covering participants in the digital lending ecosystem. Other than that, he suggested that all loan services and repayments be executed directly to the lender’s bank account and that disbursements always be made to the borrower’s bank account.
On technology, the panel suggested that meeting basic prescribed technological standards should be a prerequisite for offering digital loans. Additionally, every digital lending application should have public policies regarding data storage, use, and privacy; and the data should be stored on local servers.
“The data must be collected from the borrower or potential borrower with prior information on the purpose, use and implication of such data and with the explicit consent of the borrower in a verifiable manner” , did he declare.