Ban on lending by unchecked digital platforms on anvil

The government has already banned many unauthorized apps and may also allow the central bank to regulate third-party service providers.

The Union government is considering a legislation to ban digital lending by unregulated entities to check proliferation of illegal online lending platforms and mobile apps in an effort aimed at protecting people who borrow money from these because it is easy too, but then suffer the exorbitant interest rates and unethical recovery practices adopted by them, which have led to some suicides, two officials familiar with the matter said on Monday.

Besides banning unregulated entities, new laws may also allow the central bank to regulate third-party service providers (fin-tech firms) hired by banks and NBFCs.(Representative Image)

While the Reserve Bank of India (RBI) has put in place a regulatory framework for lenders under its control, unregulated lending apps, particularly those hosted overseas, are still operating with no checks, the two added on condition of anonymity.

The central bank’s regulations are applicable to commercial banks, primary urban co-operative banks, state co-operative banks, district central co-operative banks, non-banking financial companies (NBFCs), housing finance companies (HFCs) and all lending operations outsourced by these regulated entities to any fintech firm. Digital lending is a remote and automated lending process, largely using seamless digital technologies for customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer services.

“A legislation is needed to effectively ban unregulated digital lending activities of unauthorised entities. It is a matter under consideration,” one of the two said. There are several cases of harassment and suicide because of unauthorised lending apps, often having links with China, a second official said. HT on November 16 reported that two persons from Assam were arrested for abetment of suicide of a 34-year-old lab technician from Diva in connection with an online loan. Quoting a BBC investigation on October 11, HT reported at least five-dozen similar cases because of instant loan apps, mostly having links to China.

The government has already banned many such unauthorised apps on recommendations of the home ministry . “The government also asked multinational hosts of app stores to remove such personal loan apps that target Indians without being registered with the central bank or with the government. As a result, number of lending apps at Google Playstore has been reduced from about 3,000 to approximately 300 now,” the second person said.

Besides banning unregulated entities, new laws may also allow the central bank to regulate third-party service providers (fin-tech firms) hired by banks and NBFCs, he said. “RBI’s working group on digital lending in its November 18, 2021 report recommended setting up of a Digital Trust Agency (DIGITA) to ensure that consumers use only authorised digital apps,” he said. “It is for the government to expeditiously operationalise DIGITA, which will verify digital lending apps (DLAs) before they can be publicly distributed through app store.”

According to RBI’s working group report, overall volume of disbursement through digital mode for the sampled entities rose from ₹11,671 crore in 2017 to ₹1,41,821 crore in 2020, an over 12-fold growth in three years. It also found that the share of NBFCs in that rose from 6.3% in 2017 to 30.3% in 2020. Majority of loans disbursed digitally by NBFCs were personal loans followed by consumer finance loans.

Concerned about indiscriminate lending of unsecured loans, RBI on November 16 tightened norms for consumer credit, particularly by NBFCs and credit card issuers. The move came after RBI governor Shaktikanta Das on October 6 flagged high growth in certain components of consumer credit and advised banks and NBFCs to strengthen their internal surveillance mechanisms.

RBI regulates lending entities under its control with specific rules -- for instance, such loans are credited directly to the borrower’s bank account, and any service charge to the third-party lending service providers (LPS) are paid by regulated entities and not the borrowers -- but consumers suffer because of lack of such norms for unregulated digital lending apps.