Clipped from: https://www.thehindubusinessline.com/opinion/editorial/fintechs-seem-to-be-adapting-well-to-rbi-guidelines/article66627461.ece
Loans disbursed from digital lenders have seen a rise in Q3 of FY23
Digital lending is set to surpass traditional lending by 2030 | Photo Credit: Ruslan Fazlulov
When the Reserve Bank of India (RBI) issued its first set of digital lending guidelines in September 2022, there was pushback from the fintech industry that many players would be forced to shut shop and credit availability would shrink. But seven months on, there’s little evidence of either. Data from FACE, an industry body representing half the fintech players, show that they disbursed ₹18,537 crore in loans in Q3 FY23 — up more than two-fold from ₹8,520 crore in Q3 FY22.
An Experian paper projects that India’s digital lending market, at $270 billion now, will surpass traditional lending by 2030. This explains why the RBI is keen to improve its regulatory scrutiny by asking banks to furnish their agreements with fintech players, so that it can assess compliance with its guidelines.
RBI’s digital lending guidelines had three key components. One, it sought to better protect customers of digital lending apps from opaque loan terms, usurious rates and bad recovery practices by requiring upfront disclosures on rates and fees, and adherence to its code of conduct. Regulated players do seem to have complied. FACE data show that interest rates on fintech-originated loans ranged from 15.2 per cent to 37 per cent in Q3 FY23, with processing charges at 1.6-6.2 per cent. These rates may seem high, but must be seen in light of digital lenders catering to borrowers who cannot access mainstream lenders. Two, to ensure digital players did not exploit regulatory arbitrage, RBI mandated that they had to tie up with licensed banks or NBFCs, with loans being originated by these regulated entities. This prompted fintech players to rework their loan arrangements to avoid pooling and seek out licensed banks and NBFCs for back-end tie-ups. RBI has recently shared a white-list of approved digital lenders tied up with licensed NBFCs with the IT Ministry and the Ministry has banned illegal apps. In the interests of consumer awareness, RBI and the Ministry should make this list publicly available.
It is on the third aspect of the guidelines — the need for banks and NBFCs to assume the entire credit risk on fintech-sourced loans — that grey areas remain. While banks seem to be keen on a First Loss Default Guarantee (FLDG) model, where fintech players assume part of the credit risk on loans sourced by them, RBI seems keen to ensure that 100 per cent of the default risk is assumed only by the bank or NBFC. The raison d’etre of the fintech model is providing credit to first-time loan takers or folks with low credit scores. So, imposing the ultra-conservative underwriting norms of banks on fintech-sourced loans may curtail the market opportunity. RBI’s anxiety to ward off a retail credit bubble amid rapidly rising interest rates is understandable. But with digital lenders now required to report their borrower data to credit bureaus, RBI has the means to closely monitor delinquencies in this segment. It can perhaps give this nascent industry some leeway on the FLDG model, and tighten risk weights or provisioning norms for banks/NBFCs at the first signs of emerging stress in fintech-sourced loans.