Clipped from: https://www.financialexpress.com/opinion/old-wine-in-a-new-bottle/2992171/
Regulating these is not a new challenge for the RBI and the government. The apps are similar to NBFCs, but channel the spirits of usurious money-lenders
In the 1950s, there were concerns over the mushrooming of NBFCs, and whether they would be able to pay back depositors.
By Amol Agrawal
Lending apps have recently been a source of confusion. A few days ago, the government banned a large number of lending apps, but then it was followed by the revocation of the ban on some of the apps. In the post-monetary policy discussion with the media, Reserve Bank of India officials explained that they have sent a list of lending apps which are regulated by the central bank.
The apps which are not regulated but are on the PlayStore have been banned by the government. The series of events suggests how technology is creating new problems for financial regulation, and how there are continued gaps in demand and supply of financial services.
Before going into the said series of events, we need turn the pages of the country’s financial services history. Historically, there have been multiple financial entities that have mushroomed to offer financial services. Even before the RBI was established, India was home to multiple financial service providers such as money-lenders, indigenous banks, chit funds, nidhis, commercial banks, land banks, cooperative banks, and so on. Post its establishment, the RBI realised that despite the wide financial service landscape, there was no definition of banking, lending, deposits, and so on. The central bank defined banking and related activities for the first time in 1935, and later got more powers to regulate banking and related activities under the Banking Regulation Act 1949.
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In all these deliberations, the focus was on regulating banks, but there were several non-banking finance companies (NBFCs) which offered financial services and were spread wide across the country. In the 1950s, there were concerns over the mushrooming of NBFCs, and whether they would be able to pay back depositors. There was also the emergence of new NBFCs in form of ‘hire-purchase finance companies’ that gave loans to finance the purchasing of trucks and motor vehicles. The government did not just analyse the growth and operations of NBFCs, but also gave additional responsibility of NBFC regulation to the RBI. The NBFCs were not as tightly regulated as banks. It was felt that such an approach, if taken for the NBFCs, would lead to additional risks as they also offered useful financial services in unbanked areas and sectors.
The NBFC landscape has expanded ever since and, currently, multiple NBFCs are regulated by multiple financial regulators. The RBI regulates lending-related NBFCs, Securities and Exchange Board of India (Sebi) regulates capital-market NBFCs, Insurance Regulatory Development Authority of India (IRDAI) regulates insurance entities, and so on. Apart from financial regulators, the ministry of corporate affairs regulates nidhis whereas chit funds are regulated by the state governments.
Given this brief history, let us now look at the recent case of lending apps. In a way, the lending apps are nothing but a new kind of NBFC. The RBI Governor, in the post-monetary policy media interaction, explained that the RBI provides the certification of registration to regulated NBFCs and this “NBFC uses many apps”. The RBI asked the regulated NBFCs to provide a list of the apps developed by them, and sent the list to the government. The government, in turn, asked Google to remove all the lending apps which are not on the list from the PlayStore.
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The concern with these new apps is not so much on the deposit side as it is on the lending side. In September last year, finance minister Nirmala Sitharaman chaired a meeting on illegal loan apps. She expressed concern that these apps “offered loans and/or micro credits, especially to vulnerable and low-income group people at exorbitantly high interest rates and processing/hidden charges, and predatory recovery practices involving blackmailing, criminal intimidation etc.” In this regard, the apps are like the moneylenders and indigenous banks that were criticised for charging high interest rates. The RBI tried to bring these entities, especially indigenous banks, under the regulatory fold. However, as the indigenous banks were not comfortable with being part of the regulatory system, they faded away into oblivion. Just like the moneylenders and indigenous banks, the lending apps have also proliferated due to technology. Technology has made it really easy for anyone to develop these apps, lure people into taking loans, and then use all kinds of practices to get their loans back.
The government and the RBI are back to square one, like it was in the 1950s when they started figuring out the NBFC space and then looked for ways to regulate these entities. The RBI is busy preparing and updating the list of NBFC-run apps and shares the same with the government. The government bans the apps which are not on the list. The RBI is also cancelling licences of NBFCs that were lending via third-party apps, which was seen as detrimental to public interest. The central bank has also released guidelines on digital lending, which includes digital lending apps. However given the ever-changing technology, it is difficult to keep pace with the ongoing market developments. These are not new challenges for the RBI and the government. Despite extensive regulations, people always come up with interesting ways to make money by offering all kinds of schemes to dupe people. It is just that the challenges have moved from the physical to the digital streets.
There is another problem that is usually ignored in this discussion on mushrooming financial entities. Despite decades of policies to further financial and banking inclusion, there are still gaps that are exploited by the new players. The banking-loan systems have eased considerably, but remain formidable for some sections of the public, who are then lured to take loans from these new players/apps. Perhaps one can never bridge this demand-supply gap of always keeping financial regulators and new lending providers in the fray completely.
The writer is Assistant professor, economics, Ahmedabad University