Do we need to regulate digital lending?
Digital lending, mostly via mobile apps, is a force for good. It democratises access to credit and makes it easier to reach the underserved population in towns and rural areas. Yet, there are certain factors that have given rise to predatory lending and other bad practices, prompting the RBI to ask the question — do we need to regulate digital lending?
To come up with good regulation laws, we must first understand the problems that plague the space. Let‘s break down these issues and take a deeper look.
1. Lack Of Aggregator Guidelines
Most lending apps work as a mediator/aggregator between the borrowers and lenders. The same stringent rules and regulations that apply to banks and NBFCs do not apply to them. They adopt harsh methods to recover the money from borrowers — harassment, persuasion, intimidation and threats. A number of complaints have been filed against such lenders in different cities and states, leading to a few arrests as well. Few of these applications have been noted to have their roots in China and are now banned by the government.
2. Data Breach
With a lack of strong data privacy law in India, many apps access personal data like contact lists, SMS, and the photo gallery. The general user is not fully aware of all the permission asked for and gives access out of ignorance or desperation. The Personal Data Protection Bill is yet to be passed as a law, which makes it difficult to curb this threat. It has been widely noted that owing to contact information, recollection calls go to the contacts of borrowers. But the potential misuse of data could go much beyond that.
3. Alternate Data for Credit Worthiness
A huge population in India is new to credit. They do not have a credit score. For such borrowers, apps use alternate means of data sourcing, which include going through the users’ browser history and their social media profiles to generate the score. While these are good preliminary indicators, they are not the best or most efficient means to assess creditworthiness. This could result in a high delinquency causing heavy losses to the institution.
What are the consequences?
Exploiting regulatory loopholes and adopting shady practices, predatory lending apps have been mentally harassing borrowers. Since they have access to their personal details, these companies contact their acquaintances and relatives, use social media profiles to blackmail them, and call and abuse them. Further, since there is no regulatory body to monitor and control the space, there is no proper assessment of the interest levied on the borrowings. This traps the borrowers into a vicious cycle of never-ending debts. This has driven many defaulters to commit suicide. Various state and cyber-crime departments have lodged complaints asking for proper guidelines or a regulatory body and framework to terminate these practices.
What’s next?
In January, the RBI formed a working committee of 6 members chaired by Jayant Kumar Dash, executive director at RBI. The RBI has sought inputs from different associations and organizations. Google said that it has removed 400 applications that have been violating its lending guidelines from the Play Store, while no exact figure has been out as to how many such applications exist in total. The RBI also asked players like Digital Lenders Association (DLI) and Fintech Association for Consumer Empowerment (FACE) to give inputs. Some of them are —
1. A regulatory framework or body should be set up to control the digital lending industry.
2. Developing an industry-wide code of conduct mandatory to be followed by all the players.
3. Enabling technology to find out players who use coercion and threats.
4. RBI directing reports from all the banks and NBFCs if involved in business with unauthorised lenders.
5. Centralised collection mechanism for all the players of the industry.
While these inputs are definitely in the right direction, we believe, a stricter framework around data privacy, interest rate regulations and the use of vernacular languages can strengthen the industry. The fintech industry has enabled financial inclusion and made a strong impact. Now, we just need some proper governance and best practices to curb the mites giving the industry a bad name.
Credits
Your data for cash: Indian lending apps force tough choice — The Economic Times (indiatimes.com)
