A Boston Consulting Group (BCG) survey estimated the size of Indian digital lending market at about $75 Bn in 2018, up from $46 Bn in 2016, and has projected exponential growth in the sector over the next five years. The high growth prospects in this sector have alerted Indian authorities to the challenges, which has resulted in regular updates to guidelines for digital lenders.
Recently, a leading media daily reported one such change. According to the report, the Reserve Bank of India (RBI) has banned the use of direct selling agents (DSAs) to source retail loans and carry out physical verification of documents of borrowers. The regulatory decision, based on the PMLA KYC circular that was issued in Aug 2019, is aimed at reducing incidents of data theft and minimising operational risk for banks.
While banks are allowed to carry out eKYC of borrowers or physically carry a biometric reader, but bankers believe that equipping lakhs of DSAs with readers and connectivity will be an arduous task.
As Saru Tumuluri, CEO of Khosla Labs explains, the RBI seems to be indicating that banks should either incorporate Aadhaar KYC (Offline or eKYC) in their business flows or hire agents responsible for the OSV (original seen and verified) process as opposed to outsourcing of the OSV process to third-parties.
“Offline KYC is a solution available to private entities post the Aadhaar Supreme Court judgement. In an offline verification scenario, where documents other than Aadhaar offline XML (eg- PAN, Passport, Aadhaar Card) are being verified, a DSA is not allowed to look at copies of OVDs (officially valid documents) to ensure that they become “OSV” to be able to complete KYC,” Tumuluri added.
Ever since the concept of partnering with DSAs was authorised by the RBI, agents have played a key role in augmenting retail loan sales for banks. This rule change doesn’t particularly come as a welcome move for some lenders. Bankers are concerned that this may result in the fall in the growth of consumer loans and credit cards, wherein DSA networks play a key role.
As stated by RBI, “In view of the perceived risks that emanate from allowing personal other than the authorised official of the regulated entity for carrying out certification of officially valid documents, we are of the opinion that certification shall continue to be carried out by authorised official (a bank employee) only.”
Will RBI’s Decision Have Any Impact On Digital Lenders?
Though claiming to be tech-savvy and truly digital, many digital lending companies are using direct selling agents for multiple purposes including KYC verification. It’s primarily the ones engaged with a blue-collar workforce, or those having a deeper presence in Tier 3 and 4 markets that have been actively using DSA networks. The RBI decision can prove to be a speedbump for such players.
Many lending tech startups that Inc42 spoke to also accepted this fact. But as Prashanth Ranganathan, founder and CEO, PaySense said, “There may be a short-term impact on our business with the RBI decision. However, we are hopeful that this is the first of the many changes that bring back eKYC and other digital KYC mechanisms for the security and convenience of customers.”
Anuj Kacker, cofounder and COO of MoneyTap said that daily operations won’t be affected in the short to medium term (2-6 months). “However, there might be some impact in the very short term, i.e., the next 30 days, wherein we might have to support our partners with the right technology solutions to match the compliance norms,” added
Another startup, Avail Finance, which caters to blue-collar workers, many of whom are migrant workers, believes it is a positive initiative. Although, being a pure-play fintech application, it has no direct selling agents involved in the main operations of the business, claimed CEO and founder Ankush Aggarwal.
If Not KYC, What Are Digital Lenders Using DSA’s For?
Most digital lending players are also using direct selling agents to increase their reach to the market and not just for KYC.
For instance, RupeeCircle has a ground team of 10-12 people in Mumbai and around five people in Chennai, who are very crucial to the operations. “DSAs only help us in reaching out to new markets but do not work on KYC verification or use borrower data in any other way. Customers upload the documents on their portal and the KYC is done by the team,” said founder Ajit Kumar.
Another player is Qbera which has active partnerships with DSAs across India. Considering that Qbera offers instant personal loans in over 180 Indian cities, the number of such DSA partners is over 50. But again, RBI’s decision will not impact its daily operations Qbera claimed, as it uses its own procedures and framework to carry out verification, according to cofounder and CEO, Aditya Kumar.
Will RBI’s Decision Open Opportunities For Banks And Digital Lenders Collaboration?
Dealing with a host of issues ranging from the current liquidity situation of non-bank lenders, the digital lending industry is relatively new where the policies implemented will definitely evolve with time. Broadening the prospects, there is an expectation towards greater clarity and create new business opportunities.
But the industry has a different view here. While RupeeCircle’s Ajit Kumar believes that it will definitely encourage more partnerships. “This shall help us get more people through a digital medium, without much physical interaction. Digital lending is the way forward and we have been focusing on the same,” he added. On the other hand, Qbera’s Aditya believes that the move will not rattle prospective partnerships between banks and digital lending companies.
All debate aside, the RBI’s intent behind this rule change is ensuring data protection for individuals — that is always a welcome move. Limitations on partnering with DSA’s will increase the turnaround time for the KYC process. This may, in turn, affect the loan disbursal time for customers. And certainly, as the industry accepts, the banks and NBFCs depend a lot on these DSAs for getting cost-effective and scalable distribution. The ban on using DSAs for certain processes is also likely to have a direct impact on the volumes as well for the banks and NBFCs.