RBI set to put onus on lenders to monitor loan apps – The Economic Times

Clipped from: https://economictimes.indiatimes.com/tech/technology/rbi-set-to-put-onus-on-lenders-to-monitor-loan-apps/articleshow/82555506.cms

Synopsis–The Reserve Bank of India’s working group on digital lending is all set to lay down strict governance and regulatory rules for loan recovery by online lending apps.

Mumbai: The Reserve Bank of India’s (RBI) working group to regulate unsupervised digital lending through loan apps is all set to put the onus on the banks and non-banking lenders concerned to supervise the entities with which they do business, two people aware of the development told The Economic Times.

The panel is likely to lay out strict governance and regulatory rules like mandatory disclosures on interest rates, rightful usage of android permissions and avoidance of strong-arm tactics for loan recovery.

The draft guidelines that will be open for suggestions from industry stakeholders are unlikely to cap interest rates or set minimum loan duration thresholds. The banking regulator is likely to release these guidelines soon, based on recommendations by a working group set up in January.

loan app

“The draft guidelines to regulate loan apps could be out very soon, the committee wants banks and non-banks to take the forefront in supervising such entities so that they follow the best business practices,” said a lender in the know.

The recommendations are likely to cover the challenges faced by the digital lending industry, technology competence and the policy framework needed to regulate such firms. The committee could insist on upfront disclosures on pricing, the sources said.

The current law prohibits anyone from commercially lending money without an RBI licence; the new guidelines will set the rules for those apps that are the front-end interface to licensed banks and NBFCs. These rules will make these licensed lenders formally liable in the event the partner loan app flouts any disclosure or collection rules.

The guidelines also are not expected to put minimum thresholds on loan duration. These could also talk about the rightful usage of permissions including location trackers and misuse of borrowers’ phone book.

The committee is also likely to recommend a self-regulatory organisation, or independent monitoring group, for digital lenders. While an SRO could regulate the practices around digital lending, the monitoring group shall act as a reporting body to the RBI. The current draft might be silent on who would be forming such an SRO, according to one of the sources.

RBI did not respond to ET’s queries.

“The central bank group has been meeting with several industry associations and stakeholders such as banks, technology platforms and non-bank lenders to study the best possible way to regulate this space,” said an industry executive requesting anonymity.

In India, over the course of the pandemic, thousands of such unregulated loan apps had proliferated on the internet promising quick access loans at exorbitant interest rates. These apps then used unlawful intimidation and blackmailing tactics on distressed borrowers unable to pay back on time. While the various regulatory agencies have intensified the crackdown on these unlicensed lenders since late last year, these apps keep surfacing by merely changing their names or IP addresses.

In January, the central bank constituted a working group to come up with regulations for digital lending through mobile apps. The move came amid a growing outcry in the public surrounding reports of unethical collection practices, high interest rates and the fraud and data risks by loan apps that were targeting desperate borrowers.

The six-member group consists of four central bank officials and two external members. It is chaired by Jayant Kumar Dash, executive director at the RBI.

As reported by ET, the working group over the past three months has taken the views of industry stakeholders, including Google, on the supervision of such apps on the Play Store. In January, Googlebanned hundreds of loan apps from its Play Store for flouting rules on disclosures.

There is no official count of how many such digital lending apps exist. However, industry insiders peg the number at several hundred while the count of licensed NBFC is close to 10,000.

Concerns surrounding digital lending through mobile apps first surfaced in 2020 after the onset of the pandemic triggered mass defaults. ET reported last June that at least 50 loan apps were resorting to intimidation and cyber bullying.

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