Regulating digital fintechs

Digital lending fintechs have made the requisite changes to comply with the Reserve Bank of India’s (RBI) new rules for their platforms operational.

What are the new rules?

• The rules say that all loan disbursals and repayments must be executed only between the bank accounts of the borrower and the regulated entities, with no third party involved in this process.
• The new rules are based on the November 2021 Report of the Working Group on Digital Lending Including Lending Through Online Platforms and Mobile Apps.
• It mandates RBI-regulated entities and lending service providers to disclose the all-inclusive cost of digital loans to borrowers and prevent lenders from automatically increasing credit limits without the borrower’s consent.
• Not unexpectedly, some fintechs have changed their models — from disbursing loans into prepaid cards to disbursing loans directly into the bank accounts of customers.

Why this change?

• This is meant to protect borrowers, following complaints that some lending apps were charging usurious interest rates, committing fraud and breach of data privacy.
• Oversight and governance should improve. Constructive engagement between this segment and RBI should help in continued innovation in this space, without placing the consumer to undue risks.

Way forward –

• Lending digitally is still at a nascent stage. Fintech companies collect the data from multiple sources and use analytics and artificial intelligence (AI) to derive insights.
• But banks have been slow to leverage digitalisation and data. Fintechs can complement mainline banking by providing credit and payment services to geographically spread populations.
• The blending of data, technology and money can alter finance, at the small end of the scale, of individual borrowers.

Source – The Economic Times

QUESTION – The new rules regulating the digital lending fintechs may be designed to protect the interests of the borrowers but they should also find an optimum balance between banking and technology to maximise the benefits of borrowers. Comment.