By - Akshay Ramesh on June 30, 2020
Conventionally Banks and NBFC’s[1] are considered as the ultimate source for availing loans or any other forms of financial assistance.
However, it is not easy to avail loans from them since it involves a lot of paperwork and other related procedures. Ultimately, it becomes a burden to the Borrowers[2] since their purpose will not be fulfilled if they do not have access to finance whenever it is required. In order to reduce the burden of the Borrowers, digital lending platforms came in as a rescue for the Borrowers.
Digital lending refers to the process of offering loans to the Borrowers in need of finance through online platforms after analyzing the credit-worthiness through the digital data of the Borrower made available. It enables the Borrower ease of access to finance since it is faster when compared to traditional sources of availing loans from Banks and NBFC’s.
Under this type of arrangement, the prospective Borrower will be required to provide basic information and upload documents related to KYC(“Know Your Customer”) norms online on the website of the digital lending company. On receipt of information, the credit-worthiness of the Borrower will be assessed by a digital lending company through the Loan Organisation System (“LOS”) of the digital lending company. If the digital lending company is satisfied with regard to the credit-worthiness of the Borrower then the loan will be disbursed to the Borrower through an automated sanction.
Digital lending platforms are gaining popularity in India and we have many start-ups such as Capital floats, Lending cart, Kredx, Insta cash, etc. The popularity of these digital lending platforms is expected to be higher in future since there has been an increase in the use of digital platforms in almost every sector in this modern era of digitalization. Further, it is also observed that certain banks and NBFC’s have engaged these digital lending platforms as their intermediaries.
These digital lending platforms are of various models which are as follows[3]:
The Banks and NBFC’S have partnered with the digital lending platforms to provide loan to it’s borrowers and in some cases to recover loan from the Borrowers. This is advantageous to Banks and NBFC’s since it will enable the Banks to strengthen the customer base. On the other hand, RBI has noticed the following issues with respect to digital lending platform which offer loans to such Borrowers[5]:
The digital lending platforms although are intermediaries in some cases they try to portray themselves as lenders which becomes problematic for the customers since there is no grievance redressal mechanism for consumers for matters such as charging exorbitant rate of interest, non-transparent methods to calculate interest, harsh recovery methods, unauthorized use of personal data and bad behavior.
These digital platforms when being outsourced by Banks or NBFC’s violate certain such guidelines which are applicable to all Banks and NBFC’s, which engage as a digital lending platform for the purpose of recovery or for recovery of loans or for any other purpose.
In order to tackle the issue faced by the Borrowers due to digital lending platforms, the RBI as issued the following guidelines to the banks and NBFC’s engaged in the service of digital lending[6]:
Digital lending platforms indeed have been advantageous to both the Lenders[7] and the Borrowers however these platforms have certain shortcomings such as lack of regulatory enactments, no proper grievance redressal mechanism, violation of regulatory norms, probabilities of misuse of consumer data, lack of transparency, etc. As a result, the Borrower would not approach the Digital Lending Platforms and would rather approach Banks and NBFC’s to avail loans since it is considered a safer option in terms of legal remedies. Although RBI has interfered and has laid down regulatory norms to ensure adherence to fair practices by digital lending platforms, it is applicable only to banks and NBFC’s.
If this situation persists, it will not only encourage consumer exploitation but also lead to diminishing of the fintech sector to some extent and since this is a part of fintech sector, the following steps should be taken:
The above suggested measures should be taken during this stage, since these companies have emerged mostly as start-ups and it will be easy for implementation
