The Idea Of Self-Regulations In Digital Lending

We have witnessed tremendous advancement in India’s credit scenario, predominantly led by evolved digital lending capabilities of financial institutions. A recent report by the Reserve Bank of India (RBI) working group on digital lending apps highlighted the over twelve-fold growth of overall volume of loan disbursements through the digital mode between 2017 and 2020 to Rs 1.42 lakh crore from Rs 11,671 crore. According to Research and Markets, the estimated growth of the digital lending market will be from $110 billion in 2019 to $350 billion in 2023.

The prominence of digital lending has been rapidly growing, understandably so, owing to innovative, customized and effective products with an enhanced degree of convenience and speed in the delivery of services. The need for such offerings was further catalyzed by the pandemic induced circumstances, demanding elimination of physical contact while availing financing.

The earlier mentioned report by the RBI working group also indicated that the majority of loans disbursed digitally by NBFCs were personal loans, followed by loans classified as ‘others’. These primarily include consumer finance loans and varied innovative products like Buy Now Pay Later (BNPL). Although the percentage share of amount disbursed under BNPL loans is only 0.73% for banks and 2.07% by NBFCs of the total amount disbursed, the volumes are quite significant indicating a large number of smaller sized loans for consumption.

Amidst the surging popularity and utility of digital lending, the ecosystem lacked a regulatory framework. The gap was highlighted as multiple cases of harassment and unscrupulous activities by certain illicit lenders surfaced. To address regulatory hurdles, the RBI constituted a working group of top officials and some external members to study the segment and suggest regulations on January 13. The group looked at lending apps on Indian app stores and found that 600 of the 1,100 were illegal. The committee also recently came out with proposals to regulate the sector. These include actions like framing a separate law to prevent illegal digital lending, subjecting the digital lending apps to a verification process by a nodal agency to be set up in consultation with stakeholders and disbursement and servicing of loans to be done only through the bank accounts of digital lenders. One crucial recommendation by the group is the setup of a Self-Regulatory Organisation (SRO) covering the participants in the digital lending ecosystem has been suggested.

Self-Regulations: The Next Logical Step

Digital lending, by nature, is a dynamic operational domain. In order to monitor and govern the sector, a specialized self-regulatory organization is needed. This body should constitute the entities having domain understanding and knowledge to be able to react to the evolving landscape. The self-regulation framework and the inculcated code of conduct must holistically monitor significant risk prone aspects such as the consumers’ data access, collection practices and adoption of industry ethics and standards in lenders’ varied functionalities. A separate regulatory body possesses the required degree of specialization to appropriately administer to the overall ecosystem and the multiple stakeholders involved.

The self-regulatory organizations, fundamentally, need to be highly agile and consumer-centric bodies. SRO constituting members should bring in understanding of finance, digital & technology sectors, consumer grievance redressal, risk management, and a neutral yet powerful ability to identify and correct the inappropriate practices in the ecosystem. The proposed SRO structure will bring competent and experienced industry leaders on an authoritative platform to play a collaborative role in the sector’s significant journey towards contributing to the country’s financial inclusion imperative.

As practitioners in a level playing field and carrying the apt pragmatic knowledge, SROs should collate industry trends and possess an extensive consumer understanding, in order to function as the industry’s perpetual growth. These entities should be able to offer a holistic and dynamically evolving framework for responsible lending, and to guide the industry to operate in an efficient as well as a righteous manner.

While the current advancement with respect to the regulatory recommendations by the Central Bank’s working group is an encouraging step, the suggestions would take certain time to be evaluated and then implemented. However, the existence of SROs and industry watchdogs, will ensure appropriate discipline and ethical conduct, while not compromising on the sector’s healthy growth.

To instill the much-needed faith of consumers in the system, it is pertinent that the regulator possesses adequate prowess and facilitates the right mix of measures to protect consumers’ interest. RBI’s recent actions are a reflection of this thought process, and there is no doubt that the central bank will continue to nurture this encouragement towards the country’s larger financial inclusion imperative.

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