News & Analysis

Did RBI Just Leash Digital Lending in the Country?

The Reserve Bank of India has released a set of new rules that aims to curtail the rising number of fraudulent transactions reported on loan apps, in addition to reports of exorbitant interest rates and unethical recovery practices. These guidelines aim to tighten the oversight around the lending mechanisms in the digital world.

The Bank says loan disbursals and repayments can now only be made via bank accounts belonging to the borrowers and regulated entities such as banks and NBFCs. The rules say that there would be no more pass throughs or pool accounts of the lending service providers. 

 

It appears to be about fixing responsibility

The regulations also insist that the fees paid to the lending apps need to be borne by the regulated entities and not the borrower. It also prohibited automatic increases in credit limit without consent of the borrower, something that credit card agencies have been doing for years now with impunity.  

However the apex bank took pains to state that it was not attempting to stifle the fintech innovations that have resulted in easier availability of money to a wider section of the population. It claimed that the new set of rules came from the major concern that was brought up around the unbridled engagement of third parties, mis-selling and breach of data privacy. 

 

No intention to squeeze the Fintech sector

While the intention is not to stymie the fintech segment, RBI underscored the need for certain guidelines to protect consumer interest. In the past, unbridled innovation had resulted in several fake apps coming up. However, this time the onus on guarding against such occurrence is also with the regulated entities. 

Most of these changes are based on the recommendations of a working group that RBI had set up last year to assess governance issues and consumer complaints around digital lending platforms. 

In addition to the regulations, RBI has also submitted some recommendations to the government that includes banning unregulated lending activities. It remains to be seen how these rules and the recommendations can put a cap on fake loan apps. Industry experts feel that the government needs to empower RBI with some punitive powers to make things work.  

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