RBI-led panel suggests reining in lending apps

A committee set up by the central bank has suggested reining in controversial digital loan apps through a mix of regulations, including creating a nodal agency to verify their credentials and legislation to prevent “illegal lending”.

The report’s thrust is on enhancing customer protection and making the digital lending ecosystem safe while encouraging innovation. The Reserve Bank of India (RBI) had set up a working group on digital lending, including online platforms and mobile apps, headed by its executive director Jayant Kumar Dash in January after allegations of coercive debt recovery tactics.

The committee, in its report, has now suggested that a nodal agency be set up which will verify the technological credentials of digital apps of balance sheet lenders and lending service providers. It will also maintain a public register of verified apps on its website.

According to the committee’s findings, approximately 1,100 lending apps were available for Indian Android users. Of these, 600 were illegal, the panel found.

Another recommendation is to restrict balance sheet lending—where typically the loan is retained on the lender’s balance sheet—through lending apps to entities regulated and authorized by RBI or those registered under any other law for specifically undertaking lending business.

“(The) central government may consider bringing in legislation to prevent illegal lending activities by introducing the Banning of Unregulated Lending Activities Act,” it said.

By constituting the committee, RBI had indicated its intent to look into the practices followed by some lending apps. The controversy ballooned against the backdrop of the Covid-19 pandemic when people who had been made redundant were forced to seek out quick loans—often at the click of a button from lending apps. However, when borrowers could not repay these loans, which came with exorbitant interest rates, the companies resorted to coercive recovery tactics.

The panel also recommended that a self-regulatory organization be constituted, covering participants in the digital lending ecosystem. That apart, it suggested that all loan servicing and repayments be executed directly in the lender’s bank account and that disbursements be always made into the borrower’s bank account.

About technology, the panel suggested that compliance with the prescribed baseline technology standards should be a precondition to offering digital lending. In addition, each digital lending app should have publicly available policies regarding data storage, its usage and privacy; and data should be stored in local servers.

“Data should be collected from the borrower or prospective borrower with prior information on the purpose, usage and implication of such data and with the explicit consent of the borrower in an auditable way,” it said.