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RBI releases Report on digital lending including lending through online platforms and mobile apps

Summary:
In Jan-21, RBI had constituted a working group to study and give recommendations for the rising digital lending. Digital lending has the potential to make access to financial products and services more fair, efficient and inclusive. From a peripheral supporting role a few years ago, FinTech led innovation is now at the core of the design, pricing and delivery of financial products and services. While penetration of digital methods in the financial sector is a welcome development, the benefits and certain downside risks are often interwoven in such endeavours. A balanced approach needs to be followed so that the regulatory framework supports innovation while ensuring data security, privacy, confidentiality and consumer protection. 2. Recent spurt and popularity of online lending

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In Jan-21, RBI had constituted a working group to study and give recommendations for the rising digital lending.

Digital lending has the potential to make access to financial products and services more fair, efficient and inclusive. From a peripheral supporting role a few years ago, FinTech led innovation is now at the core of the design, pricing and delivery of financial products and services. While penetration of digital methods in the financial sector is a welcome development, the benefits and certain downside risks are often interwoven in such endeavours. A balanced approach needs to be followed so that the regulatory framework supports innovation while ensuring data security, privacy, confidentiality and consumer protection.

2. Recent spurt and popularity of online lending platforms/ mobile lending apps (‘digital lending’) has raised certain serious concerns which have wider systemic implications. Against this backdrop, a Working Group (WG) is being set up to study all aspects of digital lending activities in the regulated financial sector as well as by unregulated players so that an appropriate regulatory approach can be put in place.

The committee was expected to submit its report in 3 months but submitted its report 11 yesterday, after 11 months. It is easily one of the most important committee reports of recent years and has implications for future of banking in India.

The report defines 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.

The key recommendations of the committee are:

    1. Subjecting the Digital Lending Apps to a verification process by a nodal agency to be setup in consultation with stakeholders.
    2. Setting up of a Self-Regulatory Organisation (SRO) covering the participants in the digital lending ecosystem.
    3. A separate legislation to prevent illegal digital lending activities.
    4. Development of certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions.
    5. Disbursement of loans directly into the bank accounts of borrowers; disbursement and servicing of loans only through bank accounts of the digital lenders.
    6. Data collection with prior and explicit consent of borrowers with verifiable audit trails.
    7. All data to be stored in servers located in India.
    8. Algorithmic features used in digital lending to be documented to ensure necessary transparency.
    9. Each digital lender to provide a key fact statement in a standardised format including the Annual Percentage Rate.
    10. Use of unsolicited commercial communications for digital loans to be governed by a Code of Conduct to be put in place by the proposed SRO.
    11. Maintenance of a ‘negative list’ of Lending Service Providers by the proposed SRO.
    12. Standardised code of conduct for recovery to be framed by the proposed SRO in consultation with RBI.

As I wrote in this moneycontrol article., the language of lending/finance is changing.

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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