Digital lending is the new financial buzzword. A working committee of the Reserve Bank of India found over 1100 loan-giving applications, 600 of which are unlawful.
Digital loan providers channel money from banks and other financial institutions to online borrowers.
Banks offer them money, knowing that the app owners will repay a part of the debt if the final borrower fails.
This arrangement with banks is called the First Loss Default Guarantee (FLDG). The RBI working group believes that licensed enterprises should not interfere with unregulated or illicit players.
From January to March 2020, the RBI received 2,562 complaints against illicit digital lending applications. BridgePayday: check out our $500 loan now!
Issues with digital lending
Data protection and privacy
You may not be aware that accepting the ‘terms and conditions and granting media access to your phone gives them access to a lot of data. These applications can now easily monitor your buying habits, social media activity, location, etc.
Consumer data and other information are being utilized and shared in digital credit markets.
The RBI’s working group on digital lending has issued the following recommendations:
Digital-only firms: new rules
As the fintech ecosystem grows, RBI might create a regulatory framework for fintech businesses. It may also enable digital lenders to experiment with new loan offerings.
Agencies must appoint credible digital lenders.
Another suggestion is to create a nodal body to guarantee customers only use licensed and reputable digital lending applications. Call it the Digital India Trust Agency (DIGITA).
Exclusively use applications certified by RBI’s independent agency (DIGITA).
Digital app guidelines
RBI may develop rules to meet many fundamental technical standards/requirements to provide digital lending services, including cyber security.
Govt. of data
In addition to the regulatory rules, the central bank may impose data and privacy limits on lending applications.
Regulating large fintech businesses may help them.
While the lending market is quickly expanding due to unanticipated crises, there is a substantial risk of loan default. And if numerous loans fail at the same time, these fintech businesses will be hit hard.
That implies some of them may not survive, thus aggravating our economic predicament.
These issues may subside if RBI adopts and certifies the working group’s suggestions.
If this is genuine, many fintech companies that do not fit RBI rules for financing may vanish. As a result, only influential firms can gain market share.