Context: The Reserve Bank of India (RBI) has constituted a working group on digital lending to study all aspects of digital lending activities in the regulated financial sector as well as by unregulated players.

The study will include online platforms and mobile apps. The working group will 

• evaluate digital lending activities.
• assess the penetration and standards of outsourced digital lending activities in RBI regulated entities, 
• identify risks posed by unregulated digital lending to financial stability, regulated entities and consumers
• suggest regulatory changes to promote orderly growth of digital lending and suggest measures for enhanced consumer protection

What is Digital Lending ?

• It consists of lending through web platforms or mobile apps, by taking advantage of technology for authentication and credit assessment.
• India’s digital lending market has seen a significant rise over the years. The digital lending value increased from USD 33 billion in FY15 to USD 150 billion in FY20 and is expected to hit the USD 350-billion mark by FY23.
• Banks have launched their own independent digital lending platforms to tap in the digital lending market by leveraging existing capabilities in traditional lending.

Significance of Digital Lending

• Financial Inclusion: Digital lending has the potential to make access to financial products and services more fair, efficient and inclusive. 
• Reduce Borrowing from informal channels: It helps in reducing informal borrowings as it simplifies the process of borrowing.
• Time Saving: It decreases time spent on working loan applications in-branch. Digital lending platforms have also been known to cut overhead costs by 30-50%.
• Issues with Digital Lending Platforms: There are complaints against online lending platforms with respect to high-interest rates, lack of transparency in methods to calculate interest, unauthorized use of user data, and more
• Unauthorised platforms: There is a growing number of unauthorised digital lending platforms and mobile applications
• Lack of transparency: There are high rates of interest and additional hidden charges.
• Unethical methods: They adopt unacceptable and high-handed recovery methods.
• Data privacy: They misuse agreements to access data on mobile phones of borrowers.

Initiatives by the RBI

• Non-Banking Financial Companies (NBFCs) and banks need to state the names of online platforms they are working with.
• The lending apps should issue a sanction letter to the borrower on the letter head of the bank/ NBFC concerned before the execution of the loan agreement.

Road Ahead

• Code of conduct: Digital lenders should proactively develop and commit to a code of conduct that outlines the principles of integrity, transparency and consumer protection, with clear standards of disclosure and grievance redressal.
• Oversight agency: an agency can be created that tracks all digital loans and consumer/lender credit history.
• FinTech-led innovation is now at the core of the design, pricing and delivery of financial products and services. A balanced approach needs to be followed so that the regulatory framework supports innovation while ensuring data security, privacy, confidentiality and consumer protection.