The Working Group (WG) on Digital Lending including Lending through Online Platforms and Mobile Apps, which was constituted by the Reserve Bank of India (RBI), has submitted its report in November 2021.
- Background: On January 13, 2021, the RBI had set a WG on Digital Lending with Jayant Kumar Dash, Executive Director, RBI, as the Chairman to study all aspects of digital lending activities in the regulated financial sector as well as by unregulated players.
- The report is aimed at enhancing customer protection and making the digital lending ecosystem safe while encouraging innovation.
Key Findings of the Report:
i.Density of DLAs and illegal players:
As per the findings of the WG, there were ~1,100 lending apps available for Indian Android users across ~81 application stores (from January 01 to February 28, 2021).
- Note- Out of 1100 lending apps ~600 loan apps are found to be illegal in nature.
ii.Complaints against DLAs – Sachet, a portal established by RBI under State Level Coordination Committee (SLCC) mechanism for registering complaints by the public against digital lending apps has received around 2562 complaints from January 2020 to March 2021.
Key Recommendations of the WG:
The WG suggested measures on a near to medium term basis, which can be implemented in a period of up to one year to over one year.
a.Legal & Regulatory Recommendations:
i.In the near term, the WG suggested setting up a nodal agency in consultation with stakeholders to verify the technological credentials of the Digital Lending Apps ( DLAs) of the balance sheet lenders and Lending Service Providers(LSPs) operating in the digital lending ecosystem.
ii.The nodal agency should also maintain a public register of the verified apps on its website.
iii.Recommended to set up a Self-Regulatory Organisation (SRO) covering the participants in the digital lending ecosystem to maintain a ‘negative list’ of lending service providers.
iv.In the medium term, the WG suggested the Central Government bring in legislation to prevent illegal lending activities by introducing the ‘Banning of Unregulated Lending Activities Act’.
b.Recommendations related to Technology:
i.Suggested development of certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions.
ii.Data should be stored in servers located in India.
i.Recommended restricting balance sheet lending through DLAs to entities regulated and authorised by RBI or entities registered under any other law for specifically undertaking lending business.
ii.Direct Execution: For loan servicing, suggested repayments be executed directly in a bank account of the balance sheet lender and disbursements to be made into the bank account of the borrower.
iii.Algorithmic features used in digital lending to be documented to ensure necessary transparency.
iv.Each digital lender provides a key fact statement in a standardised format including the Annual Percentage Rate.
v.Data collection with the prior and explicit consent of borrowers with verifiable audit trails.
vi.To form a standardised code of conduct (for recovery) to be framed by the proposed SRO in consultation with RBI.
vii.Use of unsolicited commercial communications for digital loans to be governed by a Code of Conduct to be put in place by the proposed SRO. Click here to know more
-RBI Withdraws over 100 Redundant Circulars
As per the recommendations of the second Regulations Review Authority (RRA 2.0), the Reserve Bank of India (RBI) withdrew more than 100 redundant circulars relate to certain norms concerning Foreign Investment in India by Foreign Portfolio Investors, RTGS (Real-Time Gross Settlement), Know Your Customer (KYC), and Anti-Money Laundering (AML)/Combating of Financing of Terrorism (CFT) – Standards.
i.Background: On April 15, 2021, RBI formed the RRA 2.0 to review the regulatory instructions, removing redundant and duplicate instructions, and reducing the compliance burden on Regulated Entities (REs) by streamlining its Regulations.
- M. Rajeshwar Rao, Deputy Governor was appointed as the head of RRA 2.0.
ii.The RRA has also constituted an Advisory Group representing the regulated entities under the chairmanship of Swaminathan J, Managing Director of State Bank of India.
iii.The RRA has been engaging in extensive consultations with both internal as well as external stakeholders, for simplification and easy implementation of the regulatory and supervisory instructions.
iv.RRA has recommended withdrawal of 150 circulars in the first tranche of recommendations.
Recent Related News:
On account of the feedback received from the Indian Banks’ Association (IBA), RBI has eased the Current Account (CA) rules for bank exposures less than Rs 5 crore and allowed borrowers to open CAs, Cash Credit (CC) and OverDraft (OD) from the banking system under certain provisions.
About Reserve Bank of India (RBI):
Establishment– April 1, 1935
Headquarters– Mumbai, Maharashtra
Governor– Shaktikanta Das
Deputy Governors– Mahesh Kumar Jain, Michael Debabrata Patra, M. Rajeshwar Rao, T. Rabi Sankar