A highly digitalized lending model is known for its scale, reliance on intangible information and much broader user participation. However, the legal status of DLAs/ LSPs, playing an intermediary role between multiple lenders and multiple borrowers, is ambiguous under the Information Technology Act, 2000 (IT Act). Section 2(1)(w) of the Act defines an intermediary as below:
‘Intermediary, with respect to any particular electronic records, means any person who on behalf of another person receives, stores or transmits that record or provides any service with respect to that record and includes telecom service providers, network service providers, internet service providers, web-hosting service providers, search engines, online payment sites, online-auction sites, online-marketplaces and cyber Cafes. Besides, the IT Act also vests certain powers with authorities such as penal action for contravention of provisions of the IT Act, power to issue directions for blocking of public access to any information through any computer resource, power to monitor and collect traffic data or information through any computer resource for cyber security.
Factors Spurting Growth of Digital Lending in India
The ubiquity of ICT has affected most conventional financial products in India and created newer products. Digital lending is driven by a combination of supply-side and demand-side factors. In India, unmet credit demand of younger cohorts, low financial inclusion, technological advancements and increasing internet penetration are going to be the strong drivers. However, trust in technology, data security and customer protection considerations will play a critical role in determining the extent of FinTech adoption. India accounts for the most number of DLAs in the world. India’s vision towards becoming a cash-light economy combined with the growth of public digital infrastructure and the demand for financial inclusiveness, makes it a front runner in the digital lending technology arena.
The following could be considered as the major factors for growth of digital technology:
- The smartphone revolution.
- Big data analytics, Artificial Intelligence (AI) and Machine Learning (ML).
- Enabling technological developments.
- Eco-system conducive for digital lenders and FinTech companies.
- Increased digital uptake to overcome challenges posed by COVID-19.
Digital Lending Lifecycle
It begins with a user discovering the app and ends with the repayment of the loan. A
generic digital lending process goes through the following stages:
- Lending app discovery and registration
- Loan application processing
- User verification
- Loan disbursement
- Loan repayment
Distribution of DLAs
Users find digital loan apps primarily through:
- Online searches on Search Engines and by browsing App Stores for related keywords.
- Marketing material distributed by digital lenders via SMS, email, online advertisements (on websites, social media, apps) and messaging platforms (WhatsApp, Telegram), etc.
Loan Application Processing
The user fills the application and thereby provides a host of information about himself. Based on these details, the app pulls his credit score, historical banking information, mobile recharge history, etc.
Based on the underwriting, the app displays the loan options that the user is eligible for.
The loan amount is then credited into the user’s account, many times to wallets and sometimes to bank accounts.
Based on the repayment plan, the user pays back the interest and principal amount in the agreed number of instalments.
Regulatory Perspectives of Digital Lending Technology
The regulatory perspectives in the specific context of deploying digital technology in lending services centre around: (i) black box AI, (ii) privacy and data security issues, (iii) cyber/ fraud risks, and (iv) forward compatibility.
Regulatory policy measures associated with FinTech in general and digital lending in particular are usually classified into three groups: 28(i) direct regulation of FinTech activities; (ii) regulation focusing on new technologies for providing financial services; and (iii) developmental regulations for digital financial services. RBI is one of the select central banks in the world to have a separate and growing FinTech set-up. In view of the emergence of new models in the FinTech ecosystem and growing role of TechFins in the financial sector, an adaptive, outcome-focused regulatory framework with a responsive and iterative approach, needs to be conceptualized in the long term by RBI. It should provide for a segmented and data driven design rather than ‘one size fits all’ mold establishing/ consolidating regulations on minimum/ baseline technology standards, security practices in handling consumer data of FinTech Apps, including digital lending.
The following are a set of recommendations and certain suggestions:
Baseline digital hygiene guidelines to be issued by DIGITA in consultation with RBI would be suitably made applicable to LSPs (through REs of RBI).
(Recommendation – RBI/ DIGITA)
Compliance with various basic technology standards/ requirements, including those on cyber security, stipulated by RBI will be a precondition to offer digital lending by the REs and for LSPs providing support to REs.
(Recommendation – RBI)
DLA of each RE should have links to its own secured website where further/ detailed information about itself and about the loans, the lender, customer care particulars, link to Sachet Portal etc. can be accessed by the prospective borrowers. Alternatively, this information could be made available on the app itself.
(Recommendation – RBI)