The recent spurt of disruptive innovations and consumerization of online lending apps (‘digital lending’), both mobile and web-based, have reshaped the way financial services are structured, provisioned and consumed. In its evolution, riding on other digital cousins such as digital payment and social media, certain actors could use it for their own ends, with unintended consequences for the nascent ecosystem. Against this backdrop, the Reserve Bank had constituted a Working Group (WG) on digital lending on January 13, 2021 to study all aspects of digital lending activities in the regulated financial sector as well as by unregulated players so that an appropriate regulatory approach can be put in place.
Constitution of the Working Group
The world has been talking about Bank 4.00 since 2014 indicating the arrival of a 4 generation evolution of financial services comprising FinTech, online/ mobile banking, virtual global market and questioning the sustainability of conventional banking. The book “Bank 4.00” by Brett King published in 2018 carried the sub-title “Banking Everywhere, Never at a Bank”. India has been whetting its appetite for digital transformation in financial services, slowly but steadily. Digital lending is one of the most prominent off-shoots of FinTech in India.
Foreground
In recent periods, a spate of digital micro-lending by various fringe entities and their dubious business conduct were flagged to RBI, Law Enforcement Agencies (LEAs), and reported in public domain. Such incidents were grappled by various LEAs at State level, albeit in non-uniform manner, after certain clarifications on identity of regulated entities were rendered by RBI, followed up by awareness drives. This undesirable experience was the imminent prompt for the constitution of the Working Group to recommend a framework to address such issues holistically.
Processes Followed
Discussions with Stakeholders: Formal and informal inputs were sought from academicians, regulated entities, FinTech advocacy groups, consumer interest groups, industry bodies, FinTechs, app stores, LEAs, and central and state governments.
Survey and Data Analysis: A representative survey was conducted to collect data on certain aspects of digital lending in which sample data was collected from 76 [16] Scheduled Commercial Banks (SCBs) and 75 NBFCs, out of which 48 SCBs and 13 NBFCs stated that they are not engaged in digital lending.
Review of Extant Regulatory / Supervisory Framework and Industry
Practices: A detailed review was carried out covering the extant regulatory framework, prevailing practices followed by DLAs, ancillary functions performed by various outsourcing agencies and FinTechs (e.g., sourcing, appraisal, payments, collection, etc.).
Review of Global Practices and Literature: The WG also reviewed internationally published literature on the subject, the global developments, approaches adopted in other jurisdictions, and the evolving views of global standard setting bodies and assessing their suitability for the Indian system.
Broad Approach
The WG kept in view three broad tenets while considering the best fit approach for crafting FinTech appropriate regulation for digital lending.
a) Technology Neutrality: Regulatory approach should be neutral towards technological differentials or business models; rather be encouraging healthy competition among all players that maximize the benefits to the financial system.
b) Principle Backed Regulations: A graded approach to any regulation generally moves through minimum regulation, light precautionary regulation, and strong precautionary regulation phases.
c) Addressing Regulatory Arbitrage: A sine qua non for an effective regulatory regime is to prevent the emergence of regulatory gaps and arbitrages that might arise from appearance of new service providers, innovative products, etc.
