Timely intervention

The Reserve Bank of India (RBI), on August 10, issued its first set of guidelines aimed at regulating the fast-expanding digital lending ecosystem in India. The guidelines are based on the report of the Working Group on Digital Lending (WGDL). More sets of guidelines are expected in the future to give the regulatory framework a composite outlook. The guidelines issued on Wednesday pertain to regulation of Registered Entities (REs) covered directly under the RBI — one among the three categories listed for regulation. The other two entities include: 1) entities authorised to carry out lending as per other statutory/regulatory provisions but not regulated by RBI; and 2) entities lending outside the purview of any statutory/ regulatory provisions. While for the first category the concerned regulator/controlling authority may formulate appropriate rules, the regulation for the second category will likely be formulated by legislative and institutional interventions by the Central government — as per the recommendations of the WGDL. The WGDL report noted that "the digital lending sector has evolved to a point where there is now a regulatory gap that needs to be plugged with laws that address issues specific to digital lending". To be particular, its concerns primarily relate to unbridled engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices. The urgency for regulation can also be linked to the expanding space of NBFCs in the digital lending sector. The RBI had noted that between 2017 and 2020, while the share of private sector banks in digital lending space reduced from 75 per cent to 50 per cent, the NBFCs expanded considerably from 12 per cent to 30 per cent. Against this background, RBI's intervention appears to be well-intended and timely. The challenge ahead in the implementation of guidelines will be to strike a fine balance between upholding consumers' interest and allowing a grooming space for innovation. When it comes to protecting consumers' interest in the digital lending ecosystem, the attributes at stake are: protecting data privacy, exorbitant lending rates, forceful recovery and fraudulent lending. The criticality of consumer data in the present age is paramount, and far outweighs benefits of free flow of digital lending operations. It is, in fact, linked to one of the fundamental rights guaranteed under the Indian Constitution. At the same time, exorbitant lending rates, forceful recovery and lending frauds would only hollow up the digital lending space from inside, if anything. Letting such things continue in the guise of promoting innovation might be, ironically, detrimental to the innovation itself. The guidelines require the banks and the Lending Service Providers to have a suitable nodal grievance redressal officer to deal with fintech- or digital lending-related complaints. Furthermore, if any complaint lodged by the borrower is not resolved by the RE within the stipulated period (currently 30 days), he/she can lodge a complaint under the Reserve Bank – Integrated Ombudsman Scheme (RB-IOS). Interestingly, the WGDL report had also recommended the institution of a self-regulatory organisation (SRO) for digital lending players. The SRO, acquainted with new market trends in digital lending, was expected to develop best practice codes that are aligned with market practice and assist with soft enforcement. Such an institution would have been a great tool for regulation. What the RBI guidelines appear to be doing is to put the customers at the center stage by placing curbs on unbridled emergence of digital lenders. This approach is welcome as, in a market where centrality rests with consumers, there is greater scope for competition, and hence, innovation. Where the guidelines appear to lack is in the strategy of regulation. While putting centralised guidelines in place, the RBI lacks in forming a decentralised system of regulation where concerns of borrowers could be appropriately balanced by the interests of the digital lenders. In sum total, the RBI's move is a good step forward. Regulation of REs should soon be followed by that of the other two categories of lenders. Additionally, more robust institutional checks could have added weight to the regulatory guidelines.