Implementation Of Data Protection Act: Decoding The Regulatory Compliances In Digital Lending

In an age permeated by technology, India has been cognizant of its usage, penetration and implications. While characterising every facet of technology in business operations, its potential in the digital lending arena has led RBI to launch a series of initiatives and schemes to bring more clarity on how critical information has to be handled. 

As India is advancing towards becoming a formidable economy, the digital transformation scenario poses serious concerns about data privacy and security, specifically in the digital lending landscape.

In addition to safeguarding data, the early roots of data-centric regulatory requirements emerged in the form of RBI’s guidelines on digital lending for finance companies and banks. This clearly outlined the non-uniform data management standards that resulted in abundant inconsistencies in lending practices. 

These guidelines successfully ensured uniformity and onboarded a considerable portion of unregulated lenders into a regulated lending space. However, it also brought the need to add another layer of data protection and privacy to the forefront, making India introduce its first Digital Personal Data Protection Act, 2023.

Understanding Digital Personal Data Protection Act 2023

Committed to establishing a robust framework associated with data protection, the Digital Personal Data Protection Act (DPDPA) marks a significant step in achieving complete data protection and privacy. Within its scope, the key areas have been safeguarding consumer data, whilst developing effective privacy governance programs for managing reputational and business risks. 

Delving into the digital lending landscape, it acts as a catalyst to bolster digital lenders to create transparent and future-ready organisations. Further, its stringent guidelines on the financial services sector will be instrumental in delivering greater authority to customers regarding data, paving the way for customer-centric digital lending. 

DPDPA’s Intersection With Digital Lending Ecosystem 

India’s financial services market has been on an exponential growth trajectory, expected to grow to a whopping $515 Bn by 2030. Given the enormous opportunity pool and lucrative business model, Digital Lending helps underserved segments acquire funds without exhaustive processing, but at the same time fails to comply with data privacy regulations, making DPDPA a pivotal move. 

With the Digital Personal Data Protection Act’s intervention, the digital lending space will witness a new regulatory framework pertaining to data privacy, customer protection, information security, outsourcing activities and much more. By adopting a well-nuanced approach, along with the prior experience gained from RBI’s reformed digital lending guidelines, digital lenders will be able to embrace DPDPA’s compliances. 

Aftermath Of The Data Protection Act 

Digital platforms partnering with regulated lending entities will be addressed as ‘data processors’, necessitating their compliance with DPDPA standards. Since they rely on customer data to assess customer credibility and reduce fraud risks, the DPDPA mandate impacts risk management by making it compulsory to obtain customer consent before undertaking credibility assessments. 

Furthermore, the majority of financial services platforms outsource tasks of customer management, but the DPDPA will limit outsourcing activities as it requires firms to align outsourcing arrangements with the compliance framework. 

Additionally, fintech digital lending players need to ensure that the customer data management cycle adheres to DPDPA’s requirement, which will affect diverse facets of customer management from onboarding to building relations. 

Charting The Path To A Redefined Digital Lending Market 

The digital lending industry is poised to propel further, making it vital for financial lending institutions to embrace the DPDPA’s provisions, geared to enhance data security, foster trust and lay the foundations for ethical data management. 

Although its implementation will be exhausting, in the long run, it stores the answer to building a financially inclusive and safe economy. Its benefits will undoubtedly help digital lenders position themselves as vanguards of data protection in a world characterised by data pillars.