From a financial consumer’s point of view, it doesn’t matter who or how lending service is provided, but the expectations of fair/ equal treatment at the pre-contractual, contractual and post-contractual stages are universal. Digital lending generates many of the similar financial consumer risks as in the conventional lending models and a few more. Innovative technologies and delivery/ interface channels, along with new lending class/ vocabulary create unique and newer risks for consumers as the focus is more on convenience/ ease of access rather than protection. The millennial generation perhaps finds it easier to ‘set up’ an account with a DLA from an unregulated FinTech provider/ shadow lender than to use a tool or channel provided by traditional banks/ NBFCs. The cross-cutting consumer protection themes in digital lending centre around access to loan products and services by digitally deprived/ data-marginalised consumers; dissemination of information and counselling to consumers; design and suitability of products and services offered; and adequacy of grievance redress infrastructure.
A brief on the extant guidelines to address the potential consumer protection issues in the banking/ NBFC sector is provided hereunder
Extant Frameworks in India
The precondition for digital financial consumer protection is a sound institutional arrangement which is varied across the world. Among various models used globally, with specific reference to digital lending, RBI follows an integrated model with an internal twin peaks approach i.e., separation of prudential regulation/ supervision from that of business conduct.
Fair Practices Code: A Fair Practices Code (FPC) has been prescribed for both banks31 and NBFCs32. These entities have the freedom of drafting their own fair practices code, enhancing the scope of the guidelines but cannot curtail the spirit of the prescribed guidelines.
Managing Risks and Code of Conduct in Outsourcing of Financial Services: Financial institutions are increasingly using outsourcing as a means of both reducing cost and accessing specialist expertise, not available internally and/ or to achieve strategic goals.
There is no specific globally recognised regulatory framework for digital lending platforms 43 . It is interesting to note that many jurisdictions have additional requirements for providers of payday loans apart from general requirements for any credit providing institutions. The products offered by most of the digital lending platforms are short tenure loans which are similar to payday loans.
A cap on costs exists for all credit contracts (excluding those offered by an authorised deposit taking institution). The cap varies based on the term of a contract and the amount of credit. It is presumed that the customer is unsuitable if he/ she is in default under another Small Amount Credit Contract (SACC) or has had more than two SACCs in the last 90 days
Payday lenders are required to carry a risk warning which needs to be made prominent and that redirects consumers to the website of the authority in charge of debt advice in the country, the Money Advice service.
The Consumer Protection Code for Licensed Moneylenders (Central Bank of Ireland, 2009) also requires that moneylenders must ensure any warnings required by the Code are prominent.
A pre- agreement quotation has to be provided to the borrower valid for five days. The cost of credit, which includes initiation cost, monthly service fee, credit life insurance and interest rates, is regulated and capped in a staggered manner.
Conduct Aspects of Digital Lending in India
In the context of equitable distribution of benefits from AI, insofar as financial inclusion iis concerned, ethical and responsible use of digital technology often comes up for discussion. There has been a general feedback on lack of such responsibility from the DLAs.
Some of the contemporary conduct aspects of DLAs have a close resemblance to the issues in the microfinance sector in 2010. Some microfinance institutions (MFIs) at that time pursued aggressive business strategy and margin growth without considering the vulnerabilities of the borrowers or its potential macro-economic impact. Some of the high yield seeking investments in the digital lending space appear to have adopted a similar approach. The difference this time is that it is amplified by digital technology and hence the potential impact might be much wider. The business conduct aspect especially those pertaining to protection of the vulnerable sections have been analysed and identified under the following broad concerns.
(a) Pre-contract stage – (i) product design and distribution; (ii) over indebtedness
(b) Contract Stage – (i) transparency; (ii) responsible pricing
(c) Post Contract Stage – (i) fair and respectful treatment; (ii) effective recourse
Minimizing cases of repayment stress/ distress
(a) In order to discourage perpetuation of ‘payday loans’, fixed sum/ non-installment unsecured STCCs with very short contractual maturity should be put under regulatory restrictions.
(Suggestion – RBI)
(b) The DLAs catering to low credit-penetrated markets, should design more sachetised/ simplified products with appropriate mobile interface designs in a manner that can be easily understood by the target consumers. Sachetised/ Simplified products would help consumers make well informed borrowing decisions.
(Recommendation – SRO/ REs)
DLAs should provide mandatory user education at user/ customer on-boarding/ sign-up stage itself about the product features and about computation of loan limit & cost. Borrowers must know the costs and conditions associated with the product before they accept to borrow and assume an obligation to pay.
(Recommendation – GoI/ RBI/ SRO)
(d) A cooling off/ look-up period of certain days (globally, it varies between 3 to 14 days) should be given to customers for exiting digitally obtained loans by paying proportionate APR without any penalty, regardless of source of funding for such exit i.e., own source or refinance.
(Recommendation – GoI/ RBI)