RBI Working Group on Digital Lending – Policy Suggestions

The Reserve Bank of India (“RBI”), through a press release issued on January 13, 2021, has set up a working group on digital lending (“WG”), to study all aspects of digital lending activities in the regulated financial sector as well as by unregulated players so that an appropriate regulatory approach can be put in place.

The move is well-timed, given the recent turmoil witnessed in the Indian digital lending space, and comes on the back of the RBI’s December 23, 2020, public caution against unauthorised digital lending platforms/ mobile Apps and its June 24, 2020, Circular, prescribing Fair Practices Code for banks and non-banking finance companies (“NBFCs”) while sourcing loans or recovering dues through digital lending platforms.

So far, the RBI has sought to regulate and exercise supervision over the Indian digital lending industry (i.e. tech platforms/ mobile Apps) primarily through its Outsourcing Guidelines for banks and NBFCs (both while outsourcing financial and IT services to third-parties), which restrict outsourcing of ‘core functions’ and pin full accountability on regulated banks and NBFCs for anything going wrong as part of their outsourcing activities.

The hitherto ‘light-touch’ treatment given by the RBI to digital lending Apps may be facing a major overhaul, basis the final WG report, which is expected to be submitted within three months. Whilst the need for revisiting the sector, especially collection practices, interest rates charged, data privacy and customer protection issues, etc., has been imminent, especially on account of several recent news reports on abusive collection practices followed by a few digital lending platforms, it is important that the regulator and the WG do not paint the entire industry with the same brush of hard-wire regulations, which will only act as a detriment to innovation in India’s digital lending sector – credited globally for making easy credit available to those at the bottom of the pyramid via technology, and being one of the key sectors to have received large foreign investments in recent years, both from VCs and strategic players.

Keeping a balanced view of the risks involved, and need for innovation in the Indian digital lending space (not to mention safeguarding investor interest), the following suggestions may be considered by the WG as part of its terms of reference and while framing its final recommendations:

  • Obviate the need for separate platform licencing: Whilst regulating the platform/ App entities by prescribing a separate NBFC category (like for P2P lending and Account Aggregators) is an easy fix, banks and NBFCs lending through third-party tech-platforms are already heavily regulated (via RBI’s Outsourcing Guidelines), and remain ultimately liable for any lending malpractice via such platforms, e.g. charging usurious interest rates, collection harassment, customer data use, etc., by their outsourced agents (i.e. digital platforms/ Apps).

Any RBI licencing for such digital lending platforms would stifle the industry, and digital innovation, which has been at the heart of India’s Fintech revolution and has been the darling of VC/PE investors in recent years – important to treat the platforms as what they are, i.e. IT/ITES and not ‘financial services’.

  • Supervision through a Self-Regulatory Organisation (“SROs”): Since like most Central Banks globally, the RBI is still finding its ground as a regulator in the digital lending space, it may be useful to bring in an SRO for such platforms. Given its role, the SRO model, with RBI’s backing, can strike a healthy balance between regulatory and developmental needs of the industry, while also acting as a sounding board for policy decisions and an enforcement agent for the RBI – quite like the role the Association of Mutual Funds in India (AMFI) has played on SEBI’s behalf in the Mutual Funds’ space.
  • Technology standards: Customer protection, good governance, data privacy and security in this space cannot be accomplished without adopting a technology driven approach. Since technology remains the USP, the WG may consider prescribing baseline technology standards (on the lines of the recent RBI Payment Aggregator/ Gateway Guidelines), to be followed by banks/ NBFCs while integrating with third-party digital lending platforms/ Apps. This will weed out non-serious platform players, help in market-making and push towards maturity of the nascent digital lending sector.
  • Customer data protection: Whilst customer data collection/ storage/ sharing practices followed by a few platforms/ Apps has been a subject matter of recent controversy, given that the RBI has typically steered clear of prescribing data protection/ privacy standards (beyond requiring customer confidentiality in the banking world), and the Personal Data Protection Bill (“PDP Bill”) is expected to be finalised/ passed this year, it may be better if this topic is left to be handled by the proposed Data Protection Authority, to be set up under the PDP Bill (given ‘financial data’ and ‘sensitive person data’ is already covered, and proposed to be protected, under the said Bill), rather than the RBI prescribing detailed norms on this for the digital lending sector.
  • Customer grievance redressal: To promote customer protection, one must understand the grievances that customers face upon experiencing new products/ services or dealing with new intermediaries. While customers may, of course, approach the Ombudsman set up under the Banking Ombudsman Scheme and Ombudsman Scheme for Non-Banking Financial Companies, 2018, respectively, for complaints against the lenders, in this case, customers should not be left without adequate recourse against the platform itself. On the lines of the existing Ombudsman system, the WG may consider setting up an Ombudsman for dealing with escalated and unresolved grievances, pertaining to digital platforms servicing customers. The Ombudsman may be authorised and eligible to deal with complaints pertaining to the levying of unauthorised/ usurious hidden charges on borrowers, undue harassment and predatory behaviour suffered by borrowers recently.
  • Global attraction: To encourage BigTech (‘TechFins’) and other global FinTech players to enter the Indian payments and lending space by leveraging their technology, at a policy level, the WG can look at the Indian digital lending space holistically, which includes not just NBFCs/ Banks, Indian digital lending fintech platforms, e-commerce players, but also large global tech players, who have committed to investing and entering the Indian financial services, and digital lending space. Hence, it is important to not prescribe further bolts, but tighten the loose screws, keeping in view the broader ‘Digital India’ movement.

Whilst it is helpful to note that the WG includes two external industry professionals, who may bring a practical approach to the table on the way forward, it is important to engage in a broad-based consultation process, seeking public and industry views, including BigTech/ Techfins, Indian and global digital lending fintechs (active in the Indian market), e-commerce/ other platform players and advisers, similar to the approach followed by MeitY in the case of the PDP Bill, to take all stakeholder suggestions on board, before issuing the WG Report, and any resulting RBI directions/ Guidelines that may be framed following the WG Report.

The RBI press release has already prompted players to start cleaning up (including removing unauthorised lending apps from their platforms), so one may only envision the significant changes that the WG Report will have on the digital lending landscape in the coming months.


 

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Photo of Anu Tiwari Anu Tiwari

Partner in the corporate and financial regulatory practice at the Mumbai office of Cyril Amarchand Mangaldas. Anu has represented many Indian and multinational fintech, banking, broker-dealer, exchange, asset management, speciality finance and information/ emerging technology companies on transactional, enforcement and regulatory matters. His…

Partner in the corporate and financial regulatory practice at the Mumbai office of Cyril Amarchand Mangaldas. Anu has represented many Indian and multinational fintech, banking, broker-dealer, exchange, asset management, speciality finance and information/ emerging technology companies on transactional, enforcement and regulatory matters. His transactional practice focus is on public & private M&A, capital raising, commercial agreements and activism matters. He also advises financial services clients on matters before the Reserve Bank of India, Securities and Exchange Board of India, Ministry of Finance, Enforcement Directorate, Serious Fraud Investigation Office, appellate tribunals and Supreme Court of India. He can be reached at anu.tiwari@cyrilshroff.com

Photo of Tanya Nayyar Tanya Nayyar

Senior Associate in the Financial Regulatory Practice at the Mumbai office of Cyril Amarchand Mangaldas. Tanya has advised domestic and global financial institutions, fintech entrants and foreign portfolio investors on a wide range of regulatory, compliance, governance and market conduct related matters, and…

Senior Associate in the Financial Regulatory Practice at the Mumbai office of Cyril Amarchand Mangaldas. Tanya has advised domestic and global financial institutions, fintech entrants and foreign portfolio investors on a wide range of regulatory, compliance, governance and market conduct related matters, and has been involved in a number of M&A transactions involving banking, NBFCs, insurance and securities market intermediaries. She can be reached at tanya.nayyar@cyrilshroff.com