The story of malicious lenders isn’t new. Shylock, in William Shakespeare’s The Merchant of Venice, wanted to extract a pound of flesh from his borrower when he failed to pay. More than 400 years later, lending has gone digital, and the story repeats itself.
Digital lending platforms offer micro loans (ranging from Rs 10 to Rs 3,000) within minutes. They offer quick and easy access to credit. In a post-pandemic India, when jobs were lost and salaries slashed, these platforms became popular with many cash-strapped Indians.
Some digital lending apps, however, turned rogue. They lured borrowers into taking loans at exorbitant interest rates. And if borrowers failed to repay, they were hounded, bullied, and shamed. Reports surfaced of lenders using an array of coercive measures. Defaulters were named and shamed on social media. Their phone book access was used to spam and threaten their contacts. And some harassed borrowers died by suicide.
So how did we get here? How did this happen in broad daylight?
Well, there are many reasons. Digital lending platforms are not directly regulated by the Reserve Bank of India. They operate in a regulatory void. In most cases they cannot lend money on their own. So, they tie up with regulated entities like banks or Non Banking Financial Companies. These regulated entities lend money to borrowers and are tasked with keeping the platforms in check. Which, in many cases, they failed to do.
In June 2020, the RBI reminded banks and Non-Banking Financial Companies that they must abide by the Fair Practices Code when they offer loans through digital lending platforms. And they must also ensure that their digital lending partners follow the Fair Practices Code while interacting with borrowers. But banks and Non-Banking Financial Companies failed to keep their digital lending partners in check. Which meant predatory lending platforms mushroomed, under the RBI’s nose.
Another factor that emboldens these platforms is the lack of a dedicated data protection law in India. The Personal Data Protection Bill, 2019 is still in the works. In its absence, apps can take sweeping consents from users to access their phone book, SMS, photo gallery, location etc. And then use this data to harass and shame borrowers.
Many digital lending platforms take advantage of these blind spots in the law. They target vulnerable users by offering them easy access to credit. To curb the menace, on January 13, 2021, the RBI formed a working-group on digital lending. The working group will study regulated players, like banks and Non-Banking Financial Company and unregulated players, like tech platforms. Its aim is to inform efficient regulation of the digital lending industry.
Although digital lending platforms have rightfully received backlash, demonising the entire industry is an overkill. Digital lenders play a significant role in financial inclusion. They service customers that banks cannot. They bring relief to people who need easy access to credit. So, the focus must be on quelling predatory practices. Not throttling the entire digital lending industry. For instance, borrowers should have the freedom to use their data to avail of loans digitally. And regulations must not strip users of this right.
It is crucial that the working group engages with industry players to develop a regulatory framework. A light touch regulation which relies on the industry to self-regulate is key. An inspiration can be drawn from the Indonesian Fintech Lenders Association, a self-regulatory organisation that works in tandem with the Indonesian regulator to regulate peer-to-peer or P2P lending apps.
The association prescribes norms for P2P lenders, and reports misconduct to the regulator. The regulator allows a P2P lender to start its business only after it obtains a recommendation from the Indonesian Joint Funding Fintech Association or AFPI, as its known in Indonesia. A self-regulatory body like the AFPI is also better equipped to work-out rules for underwriting, interest-rate, KYC, and loan terms for borrowers. It can help stop predatory use of customer data – while the personal data protection framework is finalised. A self-regulatory body will also appreciate the nuances of the market. So, it is better equipped to preserve the speed, agility, and ease of digital lending.
The working group will release its report by April. So, this is the best time for digital lending players to have their say. Some reports claim that the working group is tilting towards setting up a governing body for digital lending, which will operate like the National Payments Council of India does for retail payments.
The digital lending industry is nuanced and evolving. The RBI must maintain balance between regulation and innovation. This is not a face-off between the digital lending industry and the regulator. It is the digital lending industry and the regulator together against predatory lending platforms.
Astha Srivastava is senior associate and Aparajita Srivastava, partner at Ikigai Law.
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