Will RBI's New Laws Streamline And Promote Safe Digital Lending?

The idea is reformatory and can be of great help to regulate the finance in the market

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The pandemic led to a significant growth of digital lending. With more than 1,000 digital lending platforms, these companies promise to provide loans within a short period of time. But the authenticities of these platforms are questioned as the Reserve Bank of India (RBI) started monitoring these entities and irregularities they incurred.

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RBI has proposed a new set of guidelines for right digital lending practices. It has come up with a report stating there are about 600 illegal loan applications for digital lending purposes. These android applications are used to defraud and trick people. After constituting a Working Group and studying all aspects of digital lending in the financial sector, RBI decided to put a regulatory approach for everyone to follow.

The central bank would now strengthen non-traditional marketing techniques to correct the issues associated with digital lending applications. The governing entity has decided to regulate and keep an eye on each and every unverified digital lending platform in order to take strict actions and monitor in continuity.

The real question is, how effective will RBI’s new laws be?

Since lately, RBI has been adopting a wait and watch approach in context with digital lending platforms. But once complaints started increasing against such applications over their approach to breach of data privacy and non-legal conduct, RBI recognized that the demand of these digital loan disbursements have grown twelve times between 2017 and 2020.

RBI is now planning a proper segregation of these firms by separating these lenders into balance sheet lenders and LSPs (lending service providers). This will help RBI to frame rules for both entities easily and separately. The balance sheet lenders possess a great threat to the financial ecosystem as they carry credit riskand are liable to provide capital for the loans sanctioned.

Hence, a decision came forward that only RBI approved balance sheet lending entitles should function so that there is no disruption in the finance. The implementation of this rule seems to be a great idea as it will prohibit the original regulatory authorities associated with these balance sheet lending entities from intervening. Along with this, RBI’s new act will ban unregulated balance sheet lending activities, hence keep a check on the wrongdoer.

The approach adopted by RBI to mend these issues is governed by three major principles:

  • Neutralizing the technology: This approach would promote neutrality towards technological business models by encouraging competition in the market. This will also help maximize the benefits to the financial mechanism.
  • Regulating principal: RBI has decided to adopt a principal backed approach to give sufficient scope to promote innovation in the financial sector.
  • Defining regulatory arbitrage: The new rules will define different sets of entities in the digital lending atmosphere to ensure an operational ground along with ensuring market integrity.

RBI has also planned to regulate Lender Service Providers. Initially, without any regulatory plan it was difficult to put any regulations on LSPs since they do not carry any loan on their sheets but act as a mediator between the borrower and the lender. Most importantly, the aforementioned set of new regulatory rules will also act in regulating neo banks and Buy Now Pay Later service providers as they have been grouped in the LSP category by RBI’s Working Group.

Most of these entity’s financial statements are termed as un-regulatory as they do not come under the mainstream network of banking. RBI’s new rule that all kinds of loan disbursements servicing and repayments should be done under the transparency of the bank accounts restricting the usage of pool accounts will help regulate LSPs. Also, these regulations will help protect small borrowers from any kind of fraud as they get involved with BNPL (buy now pay later) services.

This idea is reformatory and can be of great help to regulate the finance in the market. These monitoring rules and regulations can both help grow digital lending tremendously and also keep customers of first time borrowers from the act of cheating away. Moreover, RBI should seek feedback and analyse stakeholder’s response in order to eradicate digital lending problems completely without much hassle.