RBI suggests stricter norms around digital payment in India
By Puja Sharma
The recommendations seek to protect the integrity of the system against entities not authorized to carry out lending business. Further, an institutional mechanism is envisaged to ensure the basic level of customer suitability, appropriateness, and protection of data privacy.
The Reserve Bank of India (RBI) has presented stricter norms for the digital lender in the country. A Self-Regulatory Organization or SRO would be set up covering the participants in the digital lending community, and the verification of the Digital Lending Apps.
The working group was set up by the RBI on the grounds of customer privacy concerns and business conduct in digital payment activities. It was set up on 13th January 2021 under the chairmanship of Jayant Kumar dash, Executive Director, RBI.
The WG (working group) recommendations would act at three levels: regulated entities of the RBI; other regulated/authorized entities; and unregulated entities including third-party service providers functioning in the digital financial realm.
The report further seeks to ensure that there is orderly growth in the digital lending ecosystem without it being unduly disruptive towards the existing players in the ecosystem. The idea is that the existing players in the digital lending realm should follow recommended standards of appropriateness to address conduct/ technological issues.
To prevent illegal digital activities in the country, the working group recommended separate legislation along with the development of certain standardized technology and comply with those standards for such digital lending offerings.
The loans would be paid directly into the bank account of the borrower. The working group noted that all the data of the borrowers will be stored in a server located in India.
- Compliance with the prescribed baseline technology standards should be a pre-condition to offering digital lending by the REs and by LSPs providing support to REs.
- Each DLA should have publicly available policies regarding data storage, its usage, and privacy.
- REs should document the rationale for the algorithmic features aiding lending decisions that should ensure necessary transparency.
- Data should be collected from the borrower/ prospective borrower with prior information on the purpose, usage, and implication of such data and with the explicit consent of the borrower in an auditable way.
Besides recommending concrete action points, the WG has also made several suggestions. The suggestions would require wider consultation with stakeholders and further examination by the regulators and government agencies.
Other key norms
- A nodal agency should be set up which will primarily verify the technological credentials of DLAs of the balance sheet lenders and LSPs operating in the digital lending ecosystem. It will also maintain a public register of the verified apps on its website.
- Balance sheet lending through DLAs should be restricted to entities regulated and authorized by RBI or entities registered under any other law for specifically undertaking lending business. A suitable notification in this regard should be issued by the appropriate authority.
- An SRO should be constituted covering the participants in the digital lending ecosystem.
- All loan servicing, repayments, etc. should be executed directly in a bank account of the balance sheet lender and disbursements should always be made into the bank account of the borrower.
Recommendations related to Financial Consumer Protection
- Each lender should provide a key fact statement in a standardized format.
- A look-up period of certain days should be provided for all digital loans with the option of exit by paying proportionate APR without any penalty.
- The use of unsolicited commercial communications for digital loans should be governed by a Code of Conduct.
The WG has also made several suggestions that would require wider consultation with stakeholders and further examination by the regulators and government agencies.
Trends and Future
If past performance is key to predicting the future, then it can be unambiguously stated that digital lending is the way to go. In the not-so-distant future, lending in general and especially retail and MSME lending through physical mode may be rendered obsolete as is the case with operational banking today.
As per a report, India had the highest FinTech adoption rate of 87% as of 2020. This report values the Indian FinTech market at ₹8.35 lakh crore by 2026 in comparison to ₹2.3 lakh crore in 2020 thus expanding at a compound annual growth rate of ~24.56%.
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