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Taking note of a host of complaints, the Reserve Bank of India had come out with the first leg of the digital lending norms in August. It allowed loan disbursals only by entities regulated by the banking regulator.
The government too recently launched a cracked down on several illegal lending apps which were exploiting gullible customers, charging high interest rates and issuing threats. Some of them are said to have Chinese connections.
Earlier this month, Union finance minister Nirmala Sitharaman asked RBI to prepare a ‘white list’ of digital lending apps to stamp out illegal apps.
And these concerns echoed in Global Fintech Fest on Tuesday when Prime Minister Narendra Modi said that the fintech sector needed to work relentlessly on safety and reliability.
At the same event and on the same day, Finance Minister Sitharaman said that work was on for implementing a common know your customer, or KYC, that could be used for a variety of transactions across institutions.
RBI Governor Shaktikanta Das also added his voice to the conversation, saying that Big Tech’s increasing involvement in the financial system could lead to concentration risk. According to Das, potential risks regarding competition, market and business conduct, data privacy, cyber security and financial stability needed closer scrutiny.
His remarks come at a time when Big Tech companies like Google, Amazon, and WhatsApp are already deeply involved in the country’s payment ecosystem. The government’s concerns were also explained when Das said that the growth in digital lending during the pandemic had raised concerns, which were evidenced by a spate of complaints about usurious interest rates, unethical recovery practices and data privacy.
A day after these statements, the government’s concerns were further elaborated upon by Securities and Exchange Board of India chairperson Madhabi Puri Buch. Once again at the Global Fintech Fest, Buch said that SEBI was looking to bridge the regulatory gap in the startup ecosystem.
She also revealed what fintech firms should keep in mind a few things to avoid a crackdown. First, anonymity in the financial world would be an absolute no-no. Second, transparency would be key. Buch warned that if a business model, including things like the algorithm being used, was not open to being audited or validated, it would not be permitted. And third, the SEBI chief stressed that business models that did not allow ease of exit for customers would not be supported.
Under the new RBI rules, which are coming into effect starting December, lenders must inform borrowers about all fees, charges, and the annual percentage rate in a standardised format. And there can be no automatic increase in credit limit without the borrower’s explicit consent.
The guidelines also require that the data collected by lending apps must be need-based and taken with the borrower’s prior consent. Banks and lending service providers associated with them must also appoint a nodal grievance redressal officer to deal with complaints. Other reporting requirements are also part of the guidelines.
The authorities have good reason to be concerned. According to the government, India has the highest fintech adoption rate in the world at 87 per cent, which is significantly higher than the global average rate of 64 per cent.
Fintech companies are also expected to have $1 trillion as assets under management by 2030. In 2021, India’s real-time transactions crossed 48 billion, which was 6.5 times the combined volume of the US, Canada, UK, France and Germany. Up to that point, that had been the largest absolute number of real-time transactions in the world. Furthermore, the country’s digital payments market is expected to more than triple to $10 trillion by 2026, from $3 trillion at present. As a result, by value, two out of three transactions in India will be digital by 2026.
So, where do things stand at present and what steps should the stakeholders take to improve the situation?
Srinath Sridharan, Corporate Advisor and Independent Markets Commentator says, RBI, SEBI, IRDA have access to the systems, processes, balance sheets of companies they regulate. Many fintechs are not regulated by the RBI, but seemingly in the business of lending and shadow-lending. Without regulations, these businesses can become a social issue. RBI may have concerns over EMIs in the unregulated fintech space. RBI don’t want India to be highly indebted.
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