Going to take a digital loan? Read this before you do it

Digital lending is the new buzzword in the financial world. There are over 1,100 apps that give loans and over 600 of them are illegal, according to a report by the Reserve Bank of India’s (RBI) working group.

Digital loan providers take money from banks and other financial lenders and route it to people who borrow online.

Banks give them the money on the guarantee that a certain portion of the loans will be repaid by the app owners, if the end borrower defaults.

This agreement with banks to give loans to customers is called First Loss Default Guarantee (FLDG). And the RBI working group doesn't like such agreements i.e., firms regulated by RBI should not get into such agreements with unregulated or illegal players.

In fact, the RBI has received a significantly increasing number of complaints against illegal digital lending apps i.e., around 2,562 complaints from January 2020 to March 2021.

Concerns related to digital lending

Privacy and data security

You may not even know, but while accepting the ‘terms and regulations’ and giving permission to the media, you give away access to a lot of information on your phone. The threat to you is now these apps can easily track your spending patterns, social media activity, location and much more.

Below-given table shows the critical permissions requested versus the percentage of apps requesting these permissions:
(Data source: Report by RBI’s working group)

In digital credit markets, consumer data and other information is increasingly used and shared in the lending and borrowing process.

The working group of the RBI has made these recommendations to regulate the digital lending space:

Regulation for ‘Digital only’ firms
In the emergence of a growing fintech ecosystem, RBI could set up a regulatory framework particularly for fintech firms. It may also allow digital lenders to innovate and experiment with several lending products under its supervision.

Nodal agency to authorise trusted digital lenders
Another recommendation is to set up a nodal agency to ensure that only authorised and trusted digital lending apps are used by consumers. The independent body could be called as Digital India Trust Agency (DIGITA).

Verified apps
Only apps verified by RBI’s independent body (DIGITA) should be allowed to run lending business.

Guidelines for digital apps
RBI could form guidelines to comply with various basic technology standards/requirements, including those on cyber security as a pre-condition to offer digital lending services.

Data governance
Adding to the regulatory norms suggestions, the central bank could lay down restrictions on data and privacy policy on lending apps.

Large fintech firms may benefit if RBI sets up these regulations

While the lending space is growing rapidly as people are looking to borrow funds amid an unexpected crisis, there are also high chances of loan defaults. And if multiple loan defaults happen at the same time, these fintech firms will have to take the burden on their books.

This means some of them may not even survive after a period of time and worsen the economic situation that we are already facing.

Most of these concerns may settle down if RBI approves and validates the recommendations made by the working group to run a lending business.

If this comes true, many fintech firms that do not meet RBI criteria to run a lending business may disappear. This ultimately leads to the existence of only strong players who can then acquire additional market share.

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