Digital Lending

IN NEWS:

• Recently, the Ministry of Electronics and Information Technology (MeitY) has revoked the ban on at least seven digital lending apps, including PayU’s LazyPay, Kissht, and Indiabulls Home Loans.

MORE ON NEWS:

• Earlier, the ministry issued orders to block 138 betting and gambling apps and 94 quick loan-providing apps on an “urgent” and “emergency” basis for “improper data storage and transfer” to other countries as well as money laundering.
  • Some of these apps banned by the MeitY have Chinese origin, and the blocking orders were issued by the ministry based on information and input from the Union Home Ministry.
• Later, the ministry revoked the order for some affected companies, such as PayU-owned LazyPay and Kissht, after the aggrieved fintech startups submitted documents detailing their shareholding structure to the government.

WHAT IS DIGITAL LENDING?

• According to the RBI, "digital lending" is a remote and automated lending process, largely by use of seamless digital technologies for customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service.
• I.e., digital lending consists of lending through web platforms or mobile apps, by taking advantage of technology for authentication and credit assessment.
• Example: PayU’s LazyPay, Kissht ,CASHe etc.
• 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.
• India’s burgeoning digital lending market is expected to hit $1.3 trillion by 2030, growing more than four times in value from $270 billion currently, according to a report by Inc42, a technology information platform.

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