Digital lending involves giving and recovering loans through web platforms or mobile apps. It facilitates speedy disbursal and helps lower costs. Its increased popularity amongst new-age lenders can be attributed to expanding smartphone penetration, credit range flexibility, and speedy online transactions.
BODY PARAGRAPH (Examine part- potential of digi lending, how it operates and what are the risks. Take a paragraph approach if you like):
- 1.Although lending through digital mode relative to physical mode is still at a nascent stage in the case of banks (Rs 1.12 lakh crore via digital mode against Rs 53.08 lakh crore through the physical mode) but digital lending is a powerful tool that can be used for financial inclusion.
- 2.With new innovations underway, digital lending has enabled many Financial Service Providers a way to offer much better products to the masses at a much faster rate which is even more cost-efficient and this is expected to rise significantly.
- 3.Online lending has played a pivotal role in evading cumbersome red-tapism usually involved while availing loans offline in a traditional setting. The online lending platforms have gained massive popularity among MSMEs post-Covid as they were unable to secure finance through traditional lending.
- 4.RBI has categorised digital lenders into three groups:Entities which are regulated by the RBI and are allowed to carry out lending business; entities that are authorized to carry out lending as per other statutory or regulatory provisions but are not regulated by the RBI, entities lending outside the purview of any statutory or regulatory provisions. A legislation that covers all of them is the need of the hour.
- 5.There are many gaps that are existent in this model of digital lending like any new business operation. There have been numerous instances of unscrupulous activities that have come to notice, especially during the pandemic where unauthorised lenders provided credit to customers without any collateral and at exorbitant rates coupled with unachievable deadlines to pay off these humongous debts. Resultantly, borrowers were coerced by the lenders to recollect when they were unable to pay off these debts. Instances like these hit the trust consumers have and in the end harms the growth of the FinTech companies.
In light of this, the Digital Lending Association of India has issued guidelines against such illegal activities by unauthorised digital lending applications. There is a growing need for regulation in this space or unauthorised players like pointed out above will keep popping up. Stringent provisions must be formulated which can be enforceable legally. Regulation must be enforced in this industry soon to ensure consumer trust remains unfettered.