Digital lending and issues associated

• IAS NEXT, Lucknow
• 01, Mar 2022

Reference News:-

Last week, the Reserve Bank cancelled the Certificate of Registration (CoR) issued to P C Financial Services Pvt Ltd, New Delhi, which was primarily engaged in mobile app-based lending operations through an app called ‘Cashbean’.

Why was the PC Financial licence cancelled?

• The RBI said the CoR of the company has been cancelled on account of supervisory concerns such as gross violations of RBI directions on outsourcing and knowing your customer norms.
• The company was also found to be “charging usurious rates of interest and other charges to its borrowers in an opaque manner apart from indulging in unauthorized use of logos of the RBI and Central Bureau of Investigation for recovery from the borrowers in gross violation of the Fair Practices Code”.

What’s the concern now?

• As per the findings of an RBI Working Group, released in November 2021, as many as 600 out of 1100 lending apps currently available for Indian Android users across 80 application stores are illegal apps.
• And as the number of lending apps grow, this trend would spike, since a user downloading a lending app cannot identify if the app is legitimate or not.
• It is also likely that several copycat apps and websites will mushroom across the internet.
• It could collect the user’s personally identifiable information (PII), financial data and other sensitive details, which can then be used to compromise the user’s accounts, carry out phishing attacks and identity theft.

RBI panel recommendations:

A Reserve Bank of India (RBI) Working Group (WG) on digital lending, including lending through online platforms and mobile apps submitted its recommendations in 2021.

Key recommendations:

1. A separate legislation should be enacted to oversee such lending.
2. Setup a nodal agency to vet the Digital Lending Apps.
3. A Self-Regulatory Organisation should be set up for participants in the digital lending ecosystem.
4. Develop certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions.
5. Disbursement of loans should be made directly into the bank accounts of borrowers and servicing of loans should be done only through the bank accounts of the digital lenders.
6. All data collection must require the prior consent of borrowers and come ‘with verifiable audit trails’ and the data itself ought to be stored locally.

Benefits of digital 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.

Need of the hour: A balanced approach needs to be followed so that the regulatory framework supports innovation while ensuring data security, privacy, confidentiality and consumer protection.

What are the issues wrt digital lending apps?

1. They attract borrowers with promise of loans in a quick and hassle-free manner.
2. But, Excessive rates of interest and additional hidden charges are demanded from borrowers.
3. Such platforms adopt unacceptable and high-handed recovery methods.
4. They misuse agreements to access data on the mobile phones of the borrowers.