Challenges of Digital Lending
- Since many of the lending applications offered to Indian Android users are either not authorized by the RBI or have NBFC partners with assets of less than Rs. 1,000 crores, they are all unlawful. For this sector, there was no standardized regulatory standard.
- Due to the intense competition in the market, it has been discovered that loan service providers engage in risky lending activities. They are found to provide credit to borrowers who cannot repay it. All consumers are now paying higher interest rates as a result of this.
- Serious concerns about the loan service providers’ unscrupulous collection methods, outrageous interest rates, unfair business practices, and misselling have also been raised.
- There may have been a breach of the borrowers’ data privacy due to the direct involvement of third parties and the disclosure of personal information. With regard to this particular segment, this is a serious worry.
- LSPs frequently engage in risky lending practices by providing a loan that is more than a borrower’s ability to repay to establish their position in a market with many other competitors. The risk is reduced by distributing the overall risk to customers and charging higher interest rates.
- The main issues are unrestricted third parties use, miss-selling, privacy violations, unfair business practices, charging astronomical interest rates, and unethical recovery methods.
Digital Lending and its Regulation
A remote and automated lending procedure known as “digital lending” makes extensive use of seamless digital technology for customer acquisition, the credit assessment, loan approval, payout, recovery, and related customer care. The Reserve Bank of India (RBI) established a framework to control online lending. It is disbursing and collecting loans via websites or mobile apps. It facilitates fast disbursal and lowers costs. However, these platforms frequently engage in risky behavior by lending to borrowers who cannot repay the money. The Reserve Bank of India (RBI) recently established a framework governing the nation’s digital lending market. The RBI launched a working group on digital lending, including online platforms and mobile apps, in January 2021. The panel was established as a result of worries about ethical business practices and customer protection that have emerged as a result of the boom in digital lending activity. Digital lending is one of the fintech industries in India. It has grown significantly from a volume of US$ 9 billion in 2012 to almost US$ 110 billion in 2019.
Furthermore, it is anticipated that by 2023, the digital lending market will have grown to about US$350 billion. Small borrowers without a history of credit history who conventional financial institutions don’t cater to, are among its clients in particular. Short-term loans, especially those with terms of fewer than 30 days, are their primary area of expertise. Commercial banks are quickly integrating into the category of financial intermediaries by either partnering with NBFCs to create synergies or by lending digitally.
To crack down on illicit activity by some participants, the Reserve Bank of India (RBI) has announced the first set of guidelines for digital lending. The RBI created a Working Group on “Digital Lending (WGDL), including Lending through Online Platforms and Mobile Apps to address the issues.” In November 2021, the group suggested more substantial standards for digital lenders; some of these standards have been adopted and are now part of the new standards, while others are still being looked at.
Contact Us