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As Digital Lending grows, RBI calls for a new set of regulations for the sector

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Unscrupulous activities of unauthorized digital lending apps were widely reported in recent times. The RBI working group’s report on digital lending highlights the growing lending activity of both banks & NBFCs through digital modes and calls for a new set of regulations. About 600 apps were found to be illegal of which more than 200 have been removed from Google Play Store. 

In January 2021, the Reserve Bank of India (RBI) had constituted a ‘Working Group on Digital Lending’ including Lending through Online Platforms and Mobile Apps. The Working Group chaired by Jayant Kumar Dash, Executive Director of RBI, was set up in the context of business conduct and the rising concerns surrounding customer protection following the surge in digital lending activities. The  Report of the Working Group was released recently for comments of stakeholders and members of the public which may be submitted through email by 31 December 2021. The comprehensive report focuses on enhancing customer protection and making the digital lending ecosystem safe and sound while encouraging innovation. It has proposed stringent norms for digital lenders and even new separate legislation to oversee such lending and prevent illegal digital lending activities.

According to the report, ‘a remote and automated lending process, majorly by use of seamless digital technologies in customer acquisition, the credit assessment, loan approval, disbursement, recovery, and associated customer service’ has been referred to as Digital Lending. Digital Lending Apps are those mobile and web-based applications with user interfaces that facilitate borrowing by a financial consumer from a digital lender.

The Working Group was constituted to study the issues following the surge in digital lending 

In recent years, while there has been a surge in mobile and web-based digital lending applications, a large amount of digital micro-lending by various fringe entities and their dubious business conduct were flagged to RBI and Law Enforcement Agencies (LEAs) and reported in the public domain. However, there was no uniformity in dealing with such incidents across states which called for the setting up of the Working Group to study the issues and give suggestions to deal with such issues. 

For the study, a representative survey was conducted to collect data on certain aspects of digital lending such as the amount disbursed, and the number of loans sanctioned. For this, sample data was collected from a total of 28 Scheduled Commercial Banks (SCBs) and 62 Non-Banking Financial Companies (NBFCs) which were involved in digital lending and furnished the required data. These 28 SCBs and 62 NBFCs represent 75% of the total assets of banks and 10% of the total assets of NBFCs, as on 31 March 2020. 

A higher proportion of lending took place through digital mode in the case of NBFCs 

The data from the survey reveals that lending through digital mode relative to physical mode is still at a nascent stage in the case of SCBs whereas, for NBFCs, a higher proportion of lending takes place through digital mode. The lending through digital mode was Rs. 1.12 lakh crores for SCBs as against Rs. 53.08 lakh crores through physical mode as of 31 December 2020. On the other hand, the lending through digital mode for NBFCs was Rs. 0.23 lakh crores as against Rs.1.92 lakh crores through physical mode. 

In terms of the loan amount, the percentage of the total amount being disbursed through digital channels has gone up from 0.31% in 2016-17 to 2.07% as of 31 December 2020 in 2020-21 in the case of SCBs while that for NBFCs, it has gone up from 0.55% to 10.87% during the same period. With three months left for 2020-21 to end, this percentage might still go up. 

The number of loans disbursed through digital mode by NBFCs has gone up from 0.7% to 60.5% in four years

In terms of the number of loans disbursed, 1.43% of the total number of loans disbursed by SCBs in 2016-17 were through digital channels which increased to 6.04% as of 31 December 2020 in 2020-21. During the same period, the number of loans disbursed through digital channels went up from 0.7% in 2016-17 to 60.5% in 2019-20, and 53.05% in 2020-21 (as of 31 December 2020) in the case of NBFCs. 

This is a clear indication that NBFCs have made significant progress in lending through digital mode compared to SCBs. To add to this, the share of NBFCs in the number of loans disbursed through digital channels has also increased from 6.3% in 2016-17 to 30.3% in 2019-20, while the total amount of loans disbursed during this period went up from Rs.11,671 crores to Rs.1.42 lakh crores, indicating an increasing adoption of technological innovations. 

The majority of the loans disbursed through digital channels were Personal, SME, and ‘other’ loans

In terms of the loan amount, more than half of the amount lent digitally by SCBs as well as NBFCs are in the category of personal loans followed by loans under the ‘others’ category and SME loans. Loans under the ‘others’ category for banks consist of predominantly small business and trade loans, home loans and education loans. The 3 categories- personal, SME, and other loans alone accounted for almost 95% of the loan amount disbursed by SCBs and 97.4% of the loan amount disbursed by NBFCs as of 31 December 2020. 

The amount disbursed under Buy Now Pay Later (BNPL) loans is only 0.73% of the total amount disbursed for SCBs and 2.07% for NBFCs even though the volume of loans under BNPL is significant. In terms of number, BNPL loans constituted 37% of the loans disbursed by SCBs (36 lakh loans out of a total of 96.9 lakh loans) and around 11.9% of the loans disbursed by NBFCs (36.28 lakh loans out of total 3 crore loans). This means that a large number of small size loans were being disbursed under BNPL loans. 

37.5% of the loan amount disbursed by NBFCs through digital mode were loans of tenure less than 30 days

While the pattern with respect to the purpose of the loan is similar in both cases, there is a major difference between the two with regard to the tenure of the loan. Around 87% of the loans, amounting to Rs. 98,036 crores, disbursed by SCBs have tenure of more than one year while in the case of NBFCs, only 23% of the loans amounting to Rs. 5,390 crores have a tenure of more than a year. On the other hand, the share of loans with tenure of fewer than 30 days is the highest for NBFCs accounting for 37.5% of the total loan amount disbursed by them, amounting to Rs. 8,827 crores whereas for SCBs, only 0.7% amounting to Rs. 758 crores fall under this bucket. 

Dependence on third-party apps was high for private sector banks

The report further observed that the public sector banks and foreign banks were mainly dependent on their own apps/websites for disbursal of digital loans whereas private sector banks were mainly dependent on outsourced/third-party apps. Unlike in the case of credit offered through digital channels by public sector banks which is mostly secured, in the case of private sector banks and foreign banks, it was observed that most of the digital lending portfolio was unsecured and specifically, the third-party app sourced loans in private sector banks were unsecured. In the case of NBFCs, it was observed that there wasn’t a huge difference between disbursal through own digital channels and third-party digital channels.

600 out of 1,100 lending apps in India were illegal

The report also found that there were approximately 1,100 lending apps available for Android users in India between January and February 2021. However, more than one-half of them, approximately 600 apps were found to be illegal loan apps. In the Sachet portal of RBI that is used for registration of complaints by the public, there has been a significant increase in the number of complaints against digital lending apps. Around 2,562 complaints were registered from January 2020 to March 2021. The report also notes that more than 200 apps were removed for policy violations from Google Play Store after being reported by enforcement authorities. A total of 132 apps were reported by the Police in Telangana, 17 in Tamil Nadu, 214 by the Intelligence Bureau of the Ministry of Home Affairs, and 27 by the Ministry of Elections & Information Technology. 

The Working Group made a slew of recommendations 

Going by the trend in the last five years, there has been a significant growth in digital lending even though the supporting infrastructure and other enabling factors were still evolving. This means that digital lending will grow further in the coming years with the growing technological interventions. However, the working group felt that it needs to be regulated considering the increasing complaints and evolving technology. Keeping this in mind, the Working Group has made recommendations in three levels- regulated entities of the RBI; other regulated/authorised entities; and unregulated entities including third-party service providers functioning in the digital financial realm. The recommendations are aimed at protecting the integrity of the system against entities that are not regulated and not authorized to carry out lending business. The key recommendations made by the working group are the following. 

  • Subjecting the Digital Lending Apps to a verification process by a nodal agency to be set up in consultation with stakeholders.
  • Constitution of a Self-Regulatory Organisation (SRO) which covers the participants in the digital lending ecosystem and formulation of a standardized Code of Conduct by SRO
  • Introduction of separate legislation to prevent illegal digital lending activities.
  • Development of certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions.
  • Disbursement of loans directly into the bank accounts of borrowers, disbursement, and servicing of loans only through bank accounts of the digital lenders.
  • Data collection with the prior and explicit consent of borrowers with verifiable audit trails, and storage of data in servers located in India.
  • Ensuring transparency through algorithmic features 

RBI has invited comments of stakeholders and members of the public with respect to these recommendations. The comments can be submitted by email to digitallendingwg@rbi.org.in by 31 December 2021.

Featured Image: Digital Lending growth

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