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With the crackdown over digital lending platforms in China, several such platforms have redirected their resources to India, targeting the vulnerable section of the country.

Traditionally, the unorganized lending market has always been prevalent and familiar in India. The said market provides a simpler mechanism for availing quick short-term loans, with the overall process being much more familiar than the burdensome process of availing loans from banks. However, simplicity comes at the cost of higher interest / penal rates accompanied by unlawful means of recovery.

Digital Unorganized Lending Market

The rapid development of the telecommunication sector has inadvertently enabled a large-scale expansion of unorganized lending markets (a twelvefold increase between 2017 and 2020). Today, the number of online lending platforms is shooting up exponentially. These platforms provide loans without any significant collateral or documentation requirement. Also, these platforms are so swift that the applicants receive their money within an hour of filling up their application / forms. Due to these reasons, the general public is attracted to avail loans from such platforms.

However, all that glitters is not gold. Several instances have been regularly reported against such platforms, where users have made allegations of harassment, ballooning of loan amounts, coercive collection techniques, and infringement of private data and information. In a general sense it is also commonly known that recovery methods adopted by players in unorganized lending may be unlawful as well, which in the past has also resulted in certain borrowers committing suicide on being harassed by the lenders.

Regulatory Framework

On August 24, 2017, the Reserve Bank of India (RBI) specified that the business of peer-to-peer (P2P) lending platforms i.e., 'the business of providing under a contract, the service of loan facilitation, via online medium or otherwise, to the participants who have entered into an arrangement with that platform to lend on it or to avail of loan facilitation services provided by it', should only be undertaken by a non-banking financial company (NBFC). Further, on October 04, 2017, the RBI issued comprehensive directions for P2P lending platforms in the form of 'Master Directions - Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017'. However, as on September 30, 2021, only 22 companies have registered with the RBI as an NBFC-P2P, while there are about 1,100 lending apps that are available online.

Evidently, several entities have undertaken the business of digital lending without any registration with the RBI in any form whatsoever. RBI vide its press release dated December 23, 2020, also cautioned members of the public 'not to fall prey to such unscrupulous activities and verify the antecedents of the company/ firm offering loans online or through mobile apps'.

The RBI has observed that, inter alia, banks and NBFCs have also been engaging digital lending platforms to provide loans to their customers. Being engaged in the lending business, banks and some NBFCs (such as Investment and Credit Company) are allowed by the RBI to resort to various means, including digital lending, to carry out their activities. However, vide a notification dated June 24, 2020, the RBI reemphasized that, outsourcing of any activity by banks or NBFCs does not diminish their obligations of complying with regulatory instructions (including fair practices code and outsourcing guidelines), which obligation rests solely with them.

Woefully, not all entities and participants engaged in digital lending fall within the purview of the RBI, thus the regulations issued by the RBI have little to no effect on such institutions.

Therefore, the RBI on January 13, 2021, constituted a working group to study all aspects of digital lending activities by unregulated players so that an appropriate regulatory approach towards digital lending platforms can be framed ("Working Group"). The said Working Group released its report on November 18, 2021 ("Report"), addressing various issues identified by the RBI, concerning digital lending, and providing its recommendations about the same.

The Report suggests following a three-pronged approach based on (i) legal and regulatory recommendations, (ii) technological recommendations, and (iii) consumer protection recommendations, mentioned therein. The key recommendations are as follows:

  • Setting up a nodal agency for verification of the digital lending apps.
  • Recognizing Self-Regulatory Organizations (SRO) to build a healthier ecosystem.
  • Borrower's data to be collected only with prior and explicit consent, with verifiable audit trails.
  • Maintaining a 'negative list' of lending service providers by the SRO.
  • Code of conduct for recovery to be framed by the SRO in consultation with the RBI.

Pathway to Boundless Potential

The Report essentially identifies that due to marginal penetration of the digital sector in the lending and borrowing market, the potential for growth of digital lending business in India is exponential. Thus, it needs to be efficiently harnessed. However, the features of technology also pose challenges to the regulators as it becomes difficult to identify the source of content (funds in digital lending context) and consequently it becomes even more difficult to regulate the same.

The suggestions contained in the Report points towards the constitution of a separate authority to govern the digital lending platforms. At the same time, the Report also acknowledges that for promoting growth and innovation in the sector, active assistance from the market participants (such as the Digital Lenders Association of India) would also be required in the form of self-regulation and formulating fair practice codes for the participants.

While the Working Group has fulfilled its task to much extent, but the implementation of suggestions made by the Working Group would be a very challenging task for any authority to get on the ground. The implementation would also take considerable amount of time as multiple factors would have to be accounted for while formulating the required piece of regulation. With the increasing number of incidents each day, time is a luxury which will cost a premium of more and more citizens falling prey to such predatory digital lending platforms.

It is important that the relevant regulators as well as the central legislature take a collective initiative to address the immediate concerns at hand and to safeguard the interests of public. Once a draft bill or an ordinance is enacted, it should prove to be helpful for the authorities to pave a path for a complete piece of legislature on the guidelines of the Report attending to the concerns identified by the Working Group, while maintaining the steady pace of growth and development of the digital lending sector in India.

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