Need to regulate digital lending – UPSC GS3

Context:
  • RBI had constituted the working group on digital lending including lending through online platforms and mobile apps under the chairmanship of Jayant Kumar Dash, Executive Director, RBI.
  • The working group was set up in the backdrop of business conduct and customer protection concerns arising out of the increase in digital lending activities.
  • The working group has now submitted its recommendations.
Working Group recommendations:
  • Legislation to curb Digital Lending: The group has recommended a separate legislation to prevent illegal digital lending activities.
  • Nodal Agency:  A nodal agency should be set up which will verify the technological credentials of digital apps of balance sheet lenders and lending service providers. It will also maintain a public register of verified apps on its website.
  • Self-Regulation: RBI has mooted a Self-Regulatory Organisation for participants in the digital lending ecosystem.
  • Develop a Baseline Technology: Development of certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions.
  • Data collection: Data Collection should be done with the prior and explicit consent of borrowers with verifiable audit trails. All data should also be stored in servers located in India.
  • Neo-Banks: Neo-banks should be brought under the regulations of the RBI.
  • Pricing of Loans: RBI should establish standard definitions for the cost of digital short-term consumer credit as Annual Percent Rate (APR).
  • Regulation of Third Party Service Providers: There are three players in the ecosystem: RBI-regulated entities; other regulated entities; and unregulated entities, including third-party service providers. The working group said the onus of subjecting third-party lending service providers to a standard protocol of business conduct would lie with the regulated entities, to which they are attached.