Big tech players entering the digital lending space could have regulatory implications for concentration and competition risks, a Reserve Bank of India (RBI) task force has warned.
The RBI should work on a framework for identifying and managing risks arising from major technologies as well as decentralized finance via blockchain technology, she advised.
The report states: “… digital innovations as well as the possible entry of BigTech companies can change the institutional role played by existing financial service providers and regulated entities. A consequence of this may be reflected in the vagueness of regulated and unregulated financial institutions / activities. “
Big tech companies have a large customer base and they use it to move from non-financial businesses to financial services. They do this by providing the data they have to financial entities and turn to financial services either in partnership or directly. The size of the entities is such that they present significant systemic and concentration risks to the economy, according to the report.
“Improving the traditional entity-based regulatory approach with activity-based regulations may be insufficient to ensure stability, a level playing field / competition and customer protection, in the event that a non-financial conglomerate or a BigTech company in practice provides financial services through its associates in an integrated manner, ”adds the report.
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They also suggested that “buy now, pay later” products should be treated as part of on-balance sheet loans and that the RBI should encourage the creation of more digital-only NBFCs and lay the groundwork for digital-only banks. They also said neo-banks should be subject to RBI regulations. These are suggestions the task force gave in its report, which require broader stakeholder consultation and further consideration by regulators and government agencies.
The task force, which was tasked with studying digital lending in the regulated financial sector as well as by unregulated actors, recommended forming a nodal agency that will check the technology credentials of digital lending applications (DLAs) from lenders of balance sheet and loan services. suppliers (LSP). It will also ensure that a public register of verified requests is maintained on its website.
In addition, he said on-balance sheet lending through DLAs should be limited to entities regulated by the RBI or entities authorized to lend. In addition, he has researched a self-regulatory body that will cover all participants in the digital lending ecosystem.
The working group recommended that all loan repayments be made to the balance sheet lender’s bank account and disbursements to the borrower’s bank account.
During the pandemic, the number of loan applications increased dramatically as financial distress gripped the country. But many apps resort to unfair practices, such as charging exorbitant prices, using illegal recovery practices, and more.
According to the report, there were around 1,100 loaner apps for Indian Android users in more than 80 app stores from January 1, 2021 to February 28, 2021. Of these, 600 were illegal. The RBI has received hundreds of complaints following the warning circular it issued in late December 2020.
There are three actors in the ecosystem: entities regulated by the RBI; other regulated entities; and unregulated entities, including third party service providers. The task force said that regulated entities, to which they are attached, would be responsible for subjecting third-party loan service providers to a standard protocol of doing business.
Regarding the technological aspect, the task force said that regulated entities and LSPs should adhere to the basic technological standards prescribed for offering digital loans. In addition, DLAs should have public policies regarding data storage, usage and privacy, and data servers should be located in India. In addition, the report states, data should be collected from borrowers with prior information on the purpose, use and implication of such data and with the borrower’s explicit consent in a verifiable manner. In the medium term, a comprehensive and adaptive regulatory framework for fintechs and techfins should be considered.
For consumer protection, it has been recommended that lenders should provide a key fact statement in a standardized format for all digital loan products and the lender should send an SMS / email with a summary of the product information. and ensure clients understand loan terms and conditions. In addition, a certain day consultation period should be provided for all digital loans with exit option by paying a proportional annual percentage rate without any penalty. In addition, to avoid borrower over-indebtedness, DLAs should refrain from employing predatory lending practices that push borrowers to unsustainable levels of personal debt and the task force suggested to the proposed OAR to develop guiding principles.
When it comes to loan pricing, the RBI should establish standard definitions for the cost of short-term digital consumer credit as an annual percentage rate (APR). “TDCS generally have a comparatively higher cost. Although the working group does not recommend any hard cap for the RPA, the SRO must keep an eye on this market mechanism, which can be considered a high cost tDCS ”.
Regarding collection, the working group recommended that a standardized code of conduct for collection be developed by the proposed SRO in consultation with RBI.