RBI has started to step up regulations in the Digital Lending sector to control many apps, that are becoming loan sharks. But this move is not universally supported.
The pandemic brought a financial crisis for many individuals. To start anew, the only way is to take loans. But approaching the bank for small loans is not viable.
They started to turn NBFCs for their small loan requirements. More specifically online ones. But the online is also filled with rogue apps that are the cyber equivalent of loan sharks.
Most of them are backed by the Chinese and operate on an outsourced LSP model. They charge 60-70% and above interest rates. Unfortunate ones who are unable, to repay in time are subject to their tortuous tactics.
Through their apps, they access the call log and contact lists of the phones. Then the recovery agents of these apps shame the borrowers into paying. This has led to several cases of suicides.
Because of this many states, including Telangana, Haryana, and Kerala, have placed heavy restrictions on these apps. Even RBI stepped in and blacklisted 600 apps from the app stores.
The reason for this aggressive behaviour is because like their offline counterparts they lend to people with low or no credit scores. These measures are used to absorb that risk.
To increase the RBI oversight and avoid similar mishaps, the RBI recommended a new set of regulations for digital lenders. First, it differentiated between Balance Sheet Lenders (BSLs) and Loan Service Providers (LSPs).
BSLs are licensed digital lenders who own NBFC. They take the direct risk when they lend money directly from their balance sheets. LSPs are the loan outsourcing partners of the banks and NBFCs they are cooperating with.
Being the extended arm of a financial institute, they do not take the direct risk and do not lend from their balance sheet. As a result, do not come under scrutiny. That is the reason why predatory loan apps operate on the LSP model.
One of the recommendations by RBI is to make sure that the loans should be repaid, directly to the bank account of the balance sheet lender. So should be loan disbursements. Another suggestion was to set up a public registry of verified lenders.
Another suggestion is transparency on proprietary algorithms used to underwrite the risk of the future borrower. An unregulated underwriting algorithm will misuse users’ sensitive information.
Even though transparency is good for the consumer, it is not for the lender. Most of these algorithms are confidential information and contain information the company does not want to publicise.
For the legitimate digital lenders, it not only shows the risk but also predicts the repayment ability of the consumer. Another sector that relies heavily on this technology is the BNPL. RBI has only taken a glance over the new type of lenders.
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