The working group constituted by the RBI submitted their report recently on the digital lending recommendations.
They recommended setting up an independent body to observe and verify digital lending applications, along with its surveillance. They intend to call it Digital India Trust Agency (DIGITA). They also recommended setting up SROs.
SRO or self-regulatory organisation covers the participants in this digital lending sector to identify unauthorised lending websites or apps by using the created whitelist.
Bringing forth such a body is a step forward, so also is publishing a list of lending service providers (LSP) who are then regulated and engaged by regulated entities.
All this done through their website by following the SRO code of conduct will bring in transparency.
But the effectiveness of these bodies by the SRO can be considered moderate. These recommendations are a welcomed idea. What is needed is the framework and guidelines stating when and where the regulations are placed.
These recommendations are aimed to discontinue the practice of rent-an-NBFC.
But the First Loss Default Guarantee or FLDG’s discontinuation can lead to slowing down of the sector’s growth. That will affect the small and medium ticket-size segments.
These segments will not consider it a worth risk in the absence of FLDG. It will impact LSPs who need the license from the NBFC if FLDG is discontinued.
There is a recommendation of including BNPLs as a part of lending, except merchant credit. This leads to better reporting to the credit bureaus. But this will affect the segment, especially the ultra-low-ticket BNPL.
The high operational charges and constant reporting will affect the segment. Further clarity is required for the phrase ‘definition of credit’, whether it means the companies that are not regulated, by the RBI but offer BNPL as payments should be clarified.
The recommendation also includes the development of certain baseline standards for offering the services and the requirement to store all information in India, along with constant regulation and usage of data is a good step.
These will help the expansion of cloud providers, who don’t have data centres in India to serve their customers. Also, the requirement to document the working of the AI in simple words will increase the transparency in the field.
For consumers, they recommended the standardisation of fact statements to improve transparency and enable the consumer to compare with others. But it won’t work in the case of short-term loans.
The lists will protect the consumers from joining a fraudulent scheme. But that list should be data-rich and constantly updating.
The group further recommended different aspects of digital lending to ensure a good environment for the merchants and the consumers.
Some of these measures will slow down the small/medium ticket-size digital lending segment. It will also affect others, making them alter their set-up, technology and designs.
But privacy and transparency laws will bring in monitoring the sector requires.
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