The Reserve Bank of India (RBI) has constituted an internal working group to recommend regulations for digital lending platforms and mobile applications, it said in a press release on Wednesday. Among other aspects, working group is tasked with reccomending policies for consumer protection and creating a Fair Practices Code for digital lending and fintech lending industry.
Banks and non-bank lenders that are regulated by the RBI have been outsourcing their customer acquisition practice to third-party websites and online lending platforms over the last decade. But as internet and mobile penetration increased, young startups and fintechs also entered the lending space by creating loan apps that would source clients on behalf of legitimate lenders in exchange for a fee. While the fintech is responsible for collecting documents and verifying the customers’ information, lenders were able to bring down their cost of acquisition and cost of lending.
“Digital lending has the potential to make access to financial products and services more fair, efficient and inclusive. From a peripheral supporting role a few years ago, FinTech led innovation is now at the core of the design, pricing and delivery of financial products and services. While penetration of digital methods in the financial sector is a welcome development, the benefits and certain downside risks are often interwoven in such endeavours. A balanced approach needs to be followed so that the regulatory framework supports innovation while ensuring data security, privacy, confidentiality and consumer protection.” RBI Press Release
However, in the last few months there have been several instances of fake lending websites and fake websites which not only charge exorbitant interest rates on small loan amounts and steal customer information but also resort to harassment tactics to get customers to repay their loans. These fly-by-night operators are unregulated entities, but due to lack of customer awareness are successful in manipulating borrowers as well as payment gateways to ensure their websites or mobile apps look legitimate.
“Recent spurt and popularity of online lending platforms/ mobile lending apps (‘digital lending’) has raised certain serious concerns which have wider systemic implications,” the RBI said.
The Working Group has been told to submit its report in three months time, the RBI said.
Members of the RBI working group
Composition of the Working Group (WG)
- Jayant Kumar Dash, Executive Director, RBI will be the Chairman
- Ajay Kumar Choudhary, Chief General Manager-in-Charge, Department of Supervision, RBI
- P. Vasudevan, Chief General Manager, Department of Payment and Settlement Systems, RBI
- Shri Manoranjan Mishra, Chief General Manager, Department of Regulation, RBI (Member Secretary)
- Vikram Mehta, Co-founder, Monexo Fintech
- Rahul Sasi, Cyber Security Expert and Founder of CloudSEK
Terms of Reference for the Working Group
- Evaluate digital lending activities
- Assess standards of outsourced digital lending activities by RBI regulated entities
- Identify risks posed to consumers, regulated entities and financial stability by unregulated digital lending
- Suggest regulatory changes,
- Recommend measures for expanding specific regulatory or statutory perimeters
- Suggest the role of various regulatory and government agencies
- Recommend a Fair Practices Code for digital lending players
- Suggest measures for enhanced Consumer Protection
- Recommend measures for data governance, data privacy and data security standards
- RBI warns customers about predatory digital lending apps
- Politicians from Tamil Nadu urge government to ban online lending apps
- RBI hints at working on a framework for regulating fintechs
- Google pulls 5 unauthorised lending apps from Play Store: Report
- RBI directs banks and NBFCs to increase transparency and disclosures over digital lending platforms