Sansad TV: Perspective- RBI: Digital Lending Rules | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

Introduction

Digital Lending

• The Financial Stability Board (FSB) defines FinTech as "technologically enabled innovation in financial services that could lead to new business models, applications, processes, or products, significantly affecting financial markets, institutions, and the provision of financial services." 
• While a universally accepted definition of "digital lending" remains elusive, the FSB's concept of "FinTech credit" comes close, encompassing credit activities facilitated by electronic platforms that directly match borrowers with lenders. 
• This definition broadly covers marketplace lending, primarily financed through wholesale sources, and non-loan obligations like invoice trading. 
• Additionally, FSB identifies "peer-to-peer lending" and "loan-based crowdfunding" as the core components of FinTech credit. 
• A common attribute of digital lending is its reliance on digital channels for credit intermediation services.

The Need of the Hour

• A balanced approach is imperative to establish a regulatory framework that supports innovation while simultaneously ensuring data security, privacy, confidentiality, and consumer protection.

Digital Lending in India

• Digital lending in India involves the disbursement and recovery of loans through web platforms or mobile apps, facilitating rapid fund disbursal and cost reduction. 
• Lending Service Providers (LSPs) collaborate with Non-Banking Financial Companies (NBFCs) to extend credit to customers through their platforms. 
• However, these platforms sometimes engage in imprudent practices by offering loans beyond a borrower's capacity for repayment.

New Guidelines

• All loan disbursals and repayments must occur directly between the borrower's bank account and the lending entity, eliminating the involvement of a nodal pass-through or pool account of the LSP.
• Lenders are obligated to provide borrowers with clear and standardized information about all fees, charges, and the annual percentage rate (APR).
• Charges payable to LSPs during the credit intermediation process are to be paid directly by the bank, not the borrower.
• Automatic increases in credit limits are prohibited without explicit consent from the borrower.
• Data collected by digital lending apps must be need-based, with the borrower's prior consent, and subject to audit if necessary.
• Banks and their associated LSPs are required to appoint a designated nodal grievance redressal officer to handle fintech- or digital lending-related complaints.
• In cases where banks fail to resolve grievances within 30 days, borrowers can escalate their complaints to the Integrated Ombudsman Scheme of the RBI.
• Regulated Entities must report all lending conducted through digital lending apps to Credit Information Companies (CICs).
• Lending through the Buy Now Pay Later (BNPL) mode must also be reported to CICs.

Benefits of Digital Lending

• Digital lending has the potential to democratize access to financial products and services, making them more equitable, efficient, and inclusive. 
• FinTech-led innovation has evolved from a peripheral role to a central role in designing, pricing, and delivering financial products and services.

Issues Pertaining to Digital Lending Apps
Challenges associated with unauthorized digital lending platforms and mobile applications include:

• Charging excessive interest rates and hidden fees.
• Employing unacceptable and aggressive loan recovery tactics.
• Misusing agreements to access borrowers' mobile phone data.

The Way Forward

• RBI's oversight of data collection and retention by Digital Lending Entities (DLEs) is crucial to safeguarding consumer interests against data breaches, exorbitant interest rates, digital lending fraud, and other potential abuses by a minority of entities. 
• These guidelines aim to minimize the involvement of third parties and prevent the misuse or misappropriation of data. 
• The regulatory body plays a vital role in ensuring the responsible and sustainable growth of the digital lending ecosystem while safeguarding consumers' interests.