RBI: A Game of Bans!

Hello Readers,

What a week passed by for the Indian fintech sector. It was a circus of events. The Ministry of Electronics and Information Technology (MeitY) banned 94 digital lending apps, including big ones like PayU’s LazyPay, Kissht and more.

And then a U-turn, seven apps, including PayU’s Lazypay, Kissth, and Indiabulls Home Loans, were given the green light by the government to continue operations after they toiled to submit the necessary documents. Most of the remaining banned apps must still be preparing docs for the response.

The RBI informed the fintech players about the blocking through email and asked them to submit multiple documents. It’s not clear exactly why this happened, but possible reasons floating in the market are

• over links to China,
• money laundering,
• threats to financial security,
• consumer complaints and shady recovery practices

What led to more scrutiny?

The major hot air is around the Chinese connection of these apps. The origins of the problem can be traced back to the education loan sector in China in 2016. When students were not able to get loans through main banking channels, they started taking out loans from digital lending apps at outrageously high-interest rates, sometimes even reaching 30%. These apps would use illegal methods of collection, including threatening borrowers and sharing obscene photos of them with their families if they failed to repay the loans.

The COVID-19 pandemic in 2020 presented an opportunity for these Chinese loan apps to take advantage of the situation in India, where people were looking for credit solutions during the lockdown and sudden loss of income. But these apps turned out to be a trap, leading borrowers down a dangerous path of taking multiple loans just to repay the previous ones. The data and money were also sent to China, resulting in data localization policy violations and money laundering.

On the other hand, many digital lending apps are trying to act cute with the guidelines and using the guidelines’ loopholes to justify their need which irritated RBI and the government.

When brought under the lens of the government and central bank, they have become extra cautious and invoked section 69(A) of the IT act to ban these apps. They are scrutinizing the Indian digital lending apps for any ill practice and gaps in following the guidelines.

What is Section 69(A) of the IT Act?

Section 69(A) of the Information Technology Act of 2000 empowers the central government to block online content and arrest the culprit. This is the primary law that deals with cybercrime and electronic commerce in India. Recently, the Indian government has banned many Chinese apps from citing this section of the IT act.

The act has become like a whip in the hand of the government. There are many instances in the past where the government has banned many Twitter posts and around 55,000 websites since 2015.

Where does the root of the problem lie?

So if we ask what fintech players in digital lending can do to avoid the bans? Follow the guidelines but which one? There are multiple guidelines, and each one gets interpreted differently by digital lending players. Some of the major guidelines are:

• Storage of Payment System Data
• Digital Lending Guidelines (DLG)
• PA/PG Guidelines
• Privacy Policy
• Master Direction on Digital Payment Security Controls

Storage of payment system data requires all system providers shall ensure that the entire data relating to payment systems operated by digital lending apps are stored in a system only in India. But how does RBI make sure that all the digital lending apps are following the guidelines? Regular inspections and new monitoring will add an overhead cost.

There are two main guidelines in play in digital lending: the Digital Lending Guidelines (DLG) and the PA/PG Guidelines from the RBI. The DLG states that funds should either be directed to the end borrower or, in special use cases like consumption finance, to the marketplace’s account, and there should be no nodal account in between.

On the other hand, the PA/PG guidelines consider e-commerce marketplaces as merchants if they use PA services and suggest that funds should go into a nodal settlement account for settlement to the end seller and marketplace.

This creates a grey area for lenders and the marketplaces as there is no clear sight of the fund flow.

Can it be handled better?

The Indian government and RBI have struggled to control the rise of unregulated fintech apps. Despite past bans, these apps keep resurfacing, causing concern for financial security and consumer protection. The government’s “Sachet” portal monitors user complaints, but a more proactive approach is needed.

To prevent these apps from breaking guidelines:

• The RBI and government should adopt a mandatory approval process before apps are listed on app stores. The process should involve the registration of the app on a government portal and ongoing monitoring by app stores to identify any violations.
• The RBI should address the grey area of fund flow created because of the DLG and PA/PG guidelines or confusion in the guidelines.
• The App Stores should report to the government the list of digital lending apps and any gaps they find. Also, the app stores should send the users of these apps any discrepancies they find with these apps.