Digital Lending
2021 MAY 21
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Economic Development > Indian Economy and issues > Miscellaneous
WHY IN NEWS:
- Reserve Bank of India has formed a working group in January 2021 to suggest ways to efficiently regulate the booming digital lending space
WHAT IS DIGITAL LENDING?
- It consists of lending through web platforms or mobile apps, by taking advantage of technology for authentication and credit assessment.
- Example: CASHe, a digital lending platform for salaried millennials
- Banks have launched their own independent digital lending platforms to tap in the digital lending market by leveraging existing capabilities in traditional lending.
STATISTICS:
- India’s digital lending market has seen a significant rise over the years.
- The digital lending value increased from USD 33 billion in FY15 to USD 150 billion in FY20 and is expected to hit the USD 350-billion mark by FY23.
BENEFITS OF DIGITAL LENDING
- Save cost and time:
- It decreases time and cost spent by borrower on travelling to bank branch for loan application.
- Digital lending platforms have also been known to cut overhead costs by 30-50%.
- Financial inclusion:
- Digital lending are enabling financial service providers (FSPs) to offer better products to more underserved clients in faster, fair, efficient and inclusive manner.
- Reduce borrowing from informal channels:
- It helps in reducing informal borrowings as it simplifies the process of borrowing.
- Improved credit risk management:
- Alternative underwriting data can also help the lenders weigh the creditworthiness of the borrower without having to go through thick case files.
- In the MSME category, alternate sources like PoS information, utility bill records and other fixed business expenses can offer a comprehensive credit risk assessment.
- Improved customization through robust use of data:
- Digital loan providers are now leveraging surrogate data resources such as social media, telecom activities, spending patterns along with psychometric analyses to serve the credit-invisible customers.
- Bringing more people into the formal credit system:
- By leveraging alternative data sources and data analytics, online credit providers can cast the web of their services wide and bring more people into the formal credit system.
- Utilising non-conventional sources of information to analyse the credit scoring and repayment capacity of the individual can make affordable credit accessible to the underserved.
CHALLENGES
- Exploitation:
- In many cases, excessive rates of interest and additional hidden charges are demanded from borrowers.
- Intrusive and illegal loan recovery methods:
- Such platforms adopt unacceptable and high-handed recovery methods.
- Data theft:
- They misuse agreements to access data on the mobile phones of the borrowers.
- Unauthorised digital lenders:
- There are cases about individuals and small businesses falling prey to a growing number of unauthorised digital lending platforms or mobile apps
- Increased bad debt:
- Taking out multiple simultaneous loans due to ease of access, limited or no evaluation of capacity to repay, limited customer understanding, could lead to over-indebtedness of consumers and NPA of lenders.
- Cyber frauds:
- Borrowers vulnerability to be cheated by online fraudsters will be higher due to increased presence of digital lending
INITIATIVES
- Steps taken by RBI
- RBI has constituted a working group on digital lending
- It aims to study all aspects of digital lending activities in the regulated financial sector as well as by unregulated players.
- This is to ensure that an appropriate regulatory approach is put in place.
- RBI mandated that digital lending platforms which are used on behalf of Banks and NBFCs should disclose the name of the Banks or NBFCs upfront to the customers.
- Government initiative to improve FinTech ecosystem:
- Digital India initiative:
- It aims for development of secure and stable digital infrastructure, delivering government services digitally, and universal digital literacy >> which is imperative for the development of a robust digital lending ecosystem
- Building infrastructure and institutions:
- India Stack:
- It is a set of APIs that allows governments, businesses, startups and developers to utilise an unique digital Infrastructure to solve India’s hard problems towards presence-less, paperless, and cashless service delivery
- Aadhaar
- National Payments Corporation of India (NPCI)
- NPCI was set up to build a superhighway for digital payments, taking a number of policy decisions to spread digital payments and protect consumer interest.
- New Modes of Digital Payments
- Bharat Bill Payment System (BBPS)
- Bharat Interface for Money (BHIM)
- Bharat Quick Response Code Solution (Bharat QR)
- Financial Inclusion Fund:
- To support the creation of financial inclusion infrastructure across the country including development of digital payment infrastructure
WAY FORWARD:
- Identifying the risks:
- It is very important to analyze the risks posed by unregulated digital lending to financial stability, regulated entities and consumers.
- Need for balanced approach in framing regulations:
- So that it supports innovation while ensuring data security, privacy, confidentiality and consumer protection.
- Introduce code of conduct
- A robust fair practices code for digital lending players will be helpful for the industry and consumers to engage smoothly
- Awareness generation
- Apart from establishing technological safeguards, educating and training customers to spread awareness about digital lending is also important.
- Institutions:
- An umbrella body focussed on regulation over lending on line of the National Payments Corporation of India (NPCI) needs to be formed under the oversight of RBI.
PRACTICE QUESTION:
Q. ‘While penetration of digital methods in the financial sector is a welcome development, the downside risks it poses requires a multi-dimensional response’. Discuss