Digital Lending and EASE Reform Agenda

In News

• Recently, PSU banks gave digital lending a push as part of the EASE reform agenda. 

About the news  

• They have cleared digital lending of Rs 83,091 crore in the financial year ending March 2022.
• As part of EASE 4.0 reforms, state-owned banks were asked to focus on digital lending, co-lending with non-banking firms, agriculture financing, and technological resilience for 24×7 banking.

What is Digital Lending?

• Meaning: Digital Lending involves lending through web platforms or mobile apps, utilizing technology for authentication and credit evaluation.
• Data: India still has the second-largest number of people who don’t have a bank account.

• Over 190 million Indian adults don’t have any kind of bank account thereby representing a huge opportunity. 

• The value of digital lending rose from USD 33 billion in FY15 to USD 150 billion in FY20 and is projected to reach USD 350 billion by FY23. 

Guidelines of RBI to Regulate Digital Lending

• Application

• The guidelines are applicable to all kinds of digital loans extended by commercial banks, non-banking finance companies (NBFCs), and primary, state, and district-level central co-operative banks. 

• New and existing customers
  • For new and existing customers availing fresh loans these norms will be applicable immediately.
• Existing digital loans
  • These are also in compliance with these guidelines.
• Outsourcing arrangements
  • Obligations of the regulated entities will not diminish even if they enter into outsourcing arrangements with lending service providers (LSPs)/digital lending apps (DLAs).
• Account
  • All loan disbursals and repayments are required to be executed only between the bank accounts of the borrower and the regulated entities. It should be without any pass through/ pool account of the LSP or any third party.
• Exceptions
  • The exceptions are for disbursals covered exclusively under statutory or regulatory mandate, flow of money between regulated entities for co-lending, and disbursals for specific end-use, provided the loan is disbursed directly into the bank account of the end-beneficiary.
• Fees and Penalty
  • Regulated entities have to ensure that fees that are required to be paid to LSPs are paid directly by them. 
  • They should not be charged by LSP to the borrower directly. 
  • The central bank has also clarified that penal interest on borrowers should be based on the outstanding amount of the loan. 

• The rate of such penal charges should be disclosed upfront on an annualised basis to the borrower in the key fact statement (KFS).

• A KFS will consist of the annual percentage rate (APR), the recovery mechanism, details of grievance redressal officers designated to deal with digital lending. 

• Awaking the customer
  • They will have to ensure that the borrower is made aware of all the information related to the product. 
  • They have to also inform the borrower about the LSP, who is going to take on the recovery responsibility.
• Cooling off period
  • The RBI has said that the period cannot be less than three days for loans having tenor of seven days or more. 
  • It is one day for loans having tenor of less than seven days.
    • A cooling off period is where a borrower gets an option to exit a digital loan by paying the principal and the proportionate APR without any penalty during this period.
• Collecting customer data and Data sharing
  • RBI has said that the purpose of obtaining borrowers’ consent needs to be disclosed at each stage of interface with the borrowers. And, explicit consent of the borrower must be taken before sharing personal information with any third party.
    • The exception is for cases where such sharing is needed, according to statutory or regulatory requirements.

Benefits of Digital Lending

• Improved process transparency and shorter decision turnarounds reduce customer frustration.
• It minimizes instances of incomplete files that delay application review.
• It encourages better communication with the customer regarding what information they need to provide up-front.
• Financial institutions can also digitize the analytics and intelligence areas of the lending process.
• Digital lenders often forego these hard credit checks for short-term loans such as BNPL. 

• They rely on either alternative credit score data or little to no financial information, making loans more accessible to first-time borrowers.

Risks and Challenges

• Absence of regulatory framework for digital loans such as consumer loans, instant loans, etc.
• Absence of pre-emptive safeguarding mechanisms against fraudulent lending platforms
• Lack of monitoring mechanisms for LSPs and digital lending apps.
• Other issues include unethical business practices, mis-selling, cyber security and data privacy concerns.
• LSPs often resort to reckless lending practices by endowing credit beyond a borrower’s repayment capacity.

Way Forward

• High-end metrics: Analytics allow the digital loan platform to make safer decisions.
• Efficient processing: They can immediately decide whether to give the loan or not and for what amount.
• Customer-centric approach: The main ambition of India’s digital loan market is to provide ease of documentation and processing. 
• Customers must take the necessary precautions and choose the right product and lender.
• Regulation: There was always a need for a proper set of regulations which can regulate this market. 

Source: BS