Blog

Digital Lending Platform’s Regulation under RBI

By Agniva Mandal, Student at NUJS

Introduction

‘Money Lending’ has been one of the prominent ways to earn for a long time. After the modernisation, many Money Lending Organisations started working to provide financial help to those peoples who were in dire need to fulfil their luxurious wishes. Many banks whose  primary work is to keep money and valuable belongings of the public safety, and later they even started to lend money. “The bank worked on the principle where they would loan a sum of money to the borrower and the borrower should return the money along with interest within a specific period.”[1] If the borrower fails to repay or reimburse the money, the bank will confiscate the money from them as per the agreement made between the organisation/bank and the borrower. By using this form of business, many organisations and banks made a considerable profit.[2]

In the modern era, due to technological advancement, the method of ‘Money Lending’ has shifted to digital platforms as well. These digital platforms lend money through online mode to the borrower in a much more accessible and convenient way.[3] Digital lending platforms (DLPs) are found to be more helpful because, (a) no actual agreement is required and, (b) the whole interaction, from applying for a credit till its dispensing occurs through digital platforms.

After the growth of DLPs in India, many problems were faced by the borrowers because of which the Reserve Bank of India (RBI) interfered and made some necessary changes to the laws and policies so that the borrowers should not get ill-advised.[4]

In this design, the focus is on the position of Digital Lending Platforms in India concerning developing nations, and also focuses on instances of various loan application scams in India, and the changes in laws and policies made by the RBI to tackle these scams.

Position of India with Concerning Developing Nations

The DLPs started evolving in the world after the influx of the internet. In countries like USA, Canada, UK, Switzerland, etc., these DLPs popularises categorically fast. These platforms became more convenient for the people as they started using DLPs to yield loans more than the main finance. Hence, the Regulating Organisations in these countries had to keep an eye upon these platforms. Many frauds or scams that the Digital Money Lending Organisations committed were thoroughly over-viewed by the Regulating Organisations and the accused, or the apprehended people were prosecuted. Later, many of these platforms registered themselves with The Finance Regulating Organisation of the country so that the people can trust them.

India has a large population, as a result of which, the growth of DLPs grew rapidly due to the increased use of smartphones and the internet. A large number of Indian start-ups started growing rapidly in India. The ‘CASHe’ is one of the biggest home-grown companies in the digital lending sector in India. The Mumbai-based company primarily focuses on catering to millennial, which has proved to be a high-growth market. It has disbursed more than Rs. 17 Billion worth of loans since it started operations in 2017.[5] The average loan request they received from customers were around Rs. 35,000 to 40,000.

Due to the huge growth of these Indian start-ups, many foreign digital platforms started their investment, or subsidiaries in India. In 2019, Chinese smartphone company Xiaomi started ‘Mi Credit,’ which interfaces smartphone clients with loaning organisations for speedy access to advances of up to Rs. 100,000.[6] Even Amazon India dispatched an online merchants’ loaning organisation, which connects its dealers to outsider banks. Google in 2018 collaborated with four significant Indian banks; HDFC, Federal Bank, ICICI, and Kotak Mahindra Bank to diversify their business of digital lending in India.[7]

The imposition of the lockdown in 2020, acted as a light of hope, DLPs became the basic necessity for those in need. Due to this, in 2020, DLPs saw a huge spike in their growth rate in India.[8]

According to the reports by experts of a US-based Society at Boston Consulting Group stated, between the years 2018-2023 the loans taken by borrowers through digital lending platforms in India would arrive at an aggregate of more than One Trillion Dollars.” [9]

Still in a country where a large boost to the economy is provided by agriculture, the farmers cannot get any help from DLPs due to their low wages. Therefore, it is found that DLPs can only be used in India by a stipulated number of people who have a stable economy, and people belonging to all classes of the Indian society cannot use digital lending platforms whereas in many foreign countries such as the USA, Australia, Mexico, etc. many schemes have been made to that the people of lower class can even use DLPs.[10]   

Due to some frauds being committed by the digital lending start-ups, the RBI bought subsidiaries of many of them so that the lending of loans could be under RBI’s control. The people belonging to the lower class of society cannot even avail of loans from digital lending platforms. Thus, we can see that the position of India regarding digital lending concerning foreign countries is still evolving. It can be even stated that digital lending still being new in India is a great opportunity foreign digital lending start-up who want to make better profits.   

Loan Application Scams in India

The DLPs provide loans instantly to their borrowers therefore, these loans are termed ‘instant loans.’ But with this advantage, a lot of scams have been executed by some digital lending platforms non-approved by RBI. Many borrowers complained about these digital lenders who used coercive methods such as blackmailing, harassment, etc, to recover their loans. Till now at least five people have reportedly ended their lives.[11]

These scams came to light when 75 bank accounts holding a total of Rs. 423 Crores were frozen, i.e., the functioning of these accounts was stopped by the Hyderabad Police, when a couple committed suicide due to the blackmail and harassment done to them by the members of a digital lending organisation. After investigation, many such scams were discovered by the police. According to the police reports, all these scams were conducted via 30 mobile applications which were non-approved by the RBI. The Enforcement Directorate (ED) investigated the matter and found out that 1.4 Crore transactions worth about Rs. 21,000 Crores took place.

According to the ED, these platforms ask people to download an Aggregator Application, then this application redirects the borrowers to other applications that gathers the Aadhaar, PAN details, Photo ID and later sanctions the loans. The borrowers are given 7 days to repay the loan but with a huge amount of interest and processing charges. When they fail to repay the due amount, the employees working in these lending platforms start abusing and harassing the borrowers, either by calling them from different call centres, or by blackmailing them to take more loans from their platforms.

In few cases such as the Hyderabad case, details of the borrowers such as mobile number, address, bank and income tax statements are leaked online by the platforms.[12]

Suggestions made by the RBI to tackle these Scams

To prevent the Digital Lending Platform’s scams in the future, the RBI came up with these suggestions.

These suggestions were:

  1. The RBI urged the public not to share their personal documents with unverified apps.
  2. The RBI banned the transactions from unauthorised applications in India.
  3. The RBI set up a Working Group (WG) to look into the transactions authorised by the DLPs under RBI.[13]
  4. The RBI mandated that the DLPs used on behalf of Banks and Non-Banking Financial Companies (NBFC’s) should disclose the name of the Banks and NBFC’s to its customers.
  5. The platforms under RBI are required to draw the transactions from their borrowers in the name of RBI such that the public gets secured.[14]

Conclusion      

The Digital lending application in India has had a great significance. Not only it provided relief to the public but also boosted the Indian economy. It proved to be a great relief to the people who did not have money to secure loans. Many Indian start-ups, as well as foreign digital lending platforms, made huge profits by their applications as they were more convenient.

Although many scams have been discovered since the last year, because of their easier ways of sanctioning loans people are still using them to borrow money. As a result, the RBI took appropriate steps to prevent any further such digital lending scams.

These are some of the recommendations that RBI could implement; (a) all the non-RBI registered DLPs must be traced correctly and the records of all their transactions must be stored, and (b) the RBI should make rules about the people who can take loans through digital lending platforms and set an amount depending upon the income of the borrower so that they can pay their due amount in due time.

Thus, we can conclude that if the public uses these digital lending platforms by conducting a proper research and then decide to borrow a loan. If the new policies implemented by the RBI are followed then Digital Lending Platforms will be safe for use and many people will be saved from huge trauma, harassment, and scams.

References

[1] What is Interest Rate?, Corporate Finance Institute.

[2] Rules of RBI regarding deposits, Reserve Bank of India.

[3] Alpesh Shah, Prateek Rongta, & Shashank Avadhani, Digital Lending Report in India (July. 08, 2018), Boston Consulting Group.

[4] Financial Inclusion (Dec. 31, 2018), Reserve Bank Of India

[5] Rebecca Bundhun, Why India’s Digital Lending Market is Attractive for Start-ups and Tech Giants Alike (Dec. 22, 2019), The National News.

[6] Ibid.

[7] Tinesh Bhasin, RBI brings in norms to curb malpractices by lending apps (Jun. 24, 2020), Live Mint.

[8] Patrick Brusnahan, Coronavirus Timeline: how has it affected financial services? (Nov. 02, 2020), Retail Banker International.                                                                                                                                                              

[9] Alpesh Shah, Prateek Roongta, & Shashank Avadhani, Digital Lending (Sep. 06, 2018), Boston Consulting Group.

[10] Kumar Anjani, Adoption and impact of modern varieties of paddy in India (Jul. 03, 2020) Journal for Agribusiness in Developing and Emerging Economies, 

[11] Radha N, How Instant Loan Apps Drained Crores from Borrowers (Jan. 09, 2021), The Times of India.

[12] Radha N, How Instant Loan Apps Drained Crores from Borrowers (Jan. 09, 2021), The Times of India.

[13]Sham Shastri, RBI warns public against unauthorised digital lending platforms, Apps (Dec. 23, 2020), The Times of India 

[14] Ibid.

 

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button