Tag: digital lending

Cryptos, far from the regulators’ glare

Banking & Finance

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The manner in which cryptocurrencies which began as innocuous playthings of geeks went on to become the most sought after asset class and a threat to traditional cross-border payment channels, while managing to stay beyond the reach of regulators, shows the challenges that digital innovation pose.

The original white paper on Bitcoin, put out by its founder, the anonymous Satoshi Nakamoto, described it as, “a purely peer-to-peer version of electronic cash (that) would allow online payments to be sent directly from one party to another without going through a financial institution.”

Most regulators did not take it seriously then, since its usage appeared to be limited to a few rebels who wanted to express their displeasure against the traditional fiat currencies. But Bitcoin has cloned thousands of other cryptocurrencies, which are no longer innocent payment channels but have morphed into a highly speculative asset and conduits of illicit cross-border money transfers.

The experience with cryptocurrencies shows that fintech products and innovations need to be taken more seriously going ahead and quickly brought under the regulatory radar before they grow in to a many-headed monster. There are other similar digital innovations such as digital lending or algo trades that have grown surreptitiously in the shadows in a similar manner with the regulators struggling to frame rules them.

Digital lending entities

More than a decade ago, the usurious practices of microfinance companies charging exorbitant rates of interests, harassing and shaming borrowers had led to a spate of suicides making the RBI issue regulations to check the lenders in this space. The same sequence of events is now being repeated, but in digital space.

As the Covid-19 pandemic hit the livelihoods and small businesses, digital lending apps turned out to be a ready source of money to these small borrowers. While funds could be accessed for extremely short periods, ranging from 7 to 15 days, the rates of interest charged by the digital lenders were extremely high, ranging from 60 to 100 per cent, according to reports. These apps required the borrower to give them permission to access all the information on their smartphones under the garb of doing KYC checks. The problem started when the borrowers were unable to repay the loans. They were harassed, publicly shamed and even blackmailed leading to some borrowers even resorting to the extreme step of taking their lives.

The RBI had taken note of these malpractices and issued an advisory in December and had also opened a portal for registering complaints. It recently set up a working group to give recommendations on regulating these businesses.

The swiftness shown by the central bank in trying to bring digital lending entities under regulatory purview is laudable. It’s clear that there is demand for loans from such digital lenders and total clamp-down on this space is not a good idea. Weeding out the bad players and ensuring that the lending activities continue with sufficient protection to borrowers is the way forward.

But the point to note is the manner in which the miscreants were quick to find a regulatory gap and begin operations. This requires equal amount of agility from regulators as well.

Dealing with algo trading

Another instance of a digital innovation blind-siding regulators was seen in the proliferation of algorithmic or programmed trading in Indian stock exchanges. These trades that require little or no manual intervention, where computer programs shoot orders to the exchange servers at lightning speed, currently account for over 60 per cent of turnover in derivatives section and 50 per cent in cash segment of the NSE.

There was a lot of furore about these algo trading around 2012 when it was first revealed that programmed trading, especially from colocation sites located close to exchange servers, are ahead of the small investors in trade execution due to their proximity to the exchanges. Further, the high-frequency-trading programs and other rogue programs were gaming the market to stay ahead of other traditional traders.

But no one could explain how or when algo trading had started on Indian exchanges and how they had become so widespread by 2012. The market regulator was in a fix then, since banning algos would have resulted in depriving liquidity from market and making FPIs turn away. SEBI decided to embrace algos and regulate them by issuing guidelines to exchanges, intermediaries and investors about dealing with algos.

We had dealt with this logjam in https://www.thehindubusinessline. com/opinion/columns/lokeshwarri-sk/ learn-to-live-with-algo-trading/ article22995759.ece

Regulating cryptos will be tricky

With fintech adoption growing at a break-neck speed in the country with growing smart phone and data accessibility, it is clear that innovative products that fox regulators and at times border on the illegal will keep cropping up. Regulators need to be on their toes and increase the strength of their digital surveillance team which has the skills to understand these products.

But, while innovations like digital lending and algo trading can be regulated and streamlined by regulators, cryptocurrencies will be much more challenging. This is because — one, it is hard to categorise cryptocurrencies as either currency or asset. So determining the regulator for them is quite difficult. Two, the creation or mining of the cryptocurrencies takes place globally and hence cannot be controlled. While trading can be banned in India, it will continue in other global trading platforms which can be easily accessed by Indians. Three, the investors of these crypto assets are mostly not the investors of traditional asset classes.

Hence it may not be possible for issuing reactive regulations for these crypto assets and absorb them into the mainstream as done for other tech innovations. A global consensus on crypto mining and trading could be the way forward, with uniform rules and regulations framed for crypto trading platforms in all countries. While the contours of the Cryptocurrency Bill to be presented in Parliament is awaited, the last word has not yet been said on taming this beast.

The last two decades have seen rapid innovation in fintech with these digital entities seeping into spaces hitherto occupied by traditional banks, insurance companies, stock brokers, investment advisories, and so on. Some of these entities have tried pushing the boundary between the acceptable and unacceptable, ethical and unethical, legal and illegal and, in many instances, regulators have been caught sleeping at the wheel. Regulators will have to upskill and increase the manpower equipped to deal with fintech entities so that they are not caught off-guard, once too often.

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5 ways digital lending apps can become safer for you

Personal Finance

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Lately, the digital lending platforms have gained traction as they provide easy access to the credit online and have come handy in hard times, especially after the outbreak of Covid, for those looking for instant loans. But there also have been increasing number of complaints by consumers against these platforms over mis-selling, breach of data privacy, and illegal conduct.

To protect the customers from widespread unethical practices, the Reserve Bank of India (RBI) has come out with the ‘Report of the Working Group on Digital Lending including Lending through Online Platforms and Mobile Apps’. The report contains recommendations and suggestions from both RBI and the government such as setting up of Self-Regulatory Organisation to oversee the functions of the players in the industry and to standardise certain operations. It is open for comments from public until December 31, 2021 through email.

We look at the five key areas which makes customers of digital lending apps vulnerable and how the report seek to ensure more protection for borrowers on these fronts.

Unauthorised lending apps

If you happen to opt for unauthorised digital lending apps, you may have to deal with unreasonable terms and conditions of the loan.

To have some accountability, currently, to be a digital lender, one has to be associated with a bank or a non-banking financial company or abide by the money-lending laws in the respective State in which the services are provided. But the report goes a few steps further.

Proposal: One, it suggests that digital lending should be limited to only those entities that are either regulated by the RBI or those registered under any other regulatory authority. Currently, there are some digital lending apps which are carrying out the business as intermediaries between the customer and the financial institution. Gaurav Jalan, Founder & CEO of mPokket and member at Fintech Association for Consumer Empowerment says there still exists an ambiguity on what kind of regulations that intermediaries will be subject to.

Bringing the whole digital lending space under regulatory framework is one of the significant changes that would take place if the report becomes actionable. Direct regulation will serve as an additional layer of monitoring that prevents apps from any unauthorised activities.

The working paper also suggests establishing an independent body – Digital India Trust Agency (DIGITA), which will verify the digital lending apps before they are made public. Not just that, the report also recommends setting up of a Self-Regulatory Organisation (SRO), an industry association which will lay down a code of conduct and provide a mechanism for grievance redressal of customers.

High and hidden costs

Digital lending apps generally charge higher interest rates than conventional banks and NBFCs. This is partly due to the additional risk these players take by serving users who may not have a proper credit history.

In addition to interest rate, there could be processing fee and other costs. Credible money-lending apps disclose most of these details transparently in the ‘About the app’ space in the app store and also mention them in the loan agreement. But many others don’t.

Proposal: To hold the reins of those apps that don’t disclose transparently and mispresent the rates of interest, the paper recommends that each lender provide a key fact statement (KFS) in standardised format for all digital lending products.

Especially in case of short term consumer credits (STCC), the Central bank may establish standard definitions for the cost of digital STCC/ micro credit as Annual Percent Rate (APR). This would enable disclosure of all costs in a clear and understandable way.

Another important recommendation has been that a cooling off/ look-up period of certain days should be given to customers for exiting digitally obtained loans by paying proportionate interest cost without any penalty.

Breach of data privacy

Most of the digital apps seek access to your contacts, gallery and details of other apps in your mobile phone, on installation, to create a credit profile of the borrower. There have been cases that these players breached data privacy.

Proposal: The report recommends that the app collect only minimum required personal data from the borrower after indicating usage of each data/ access permission obtained. The borrower should be provided with an option to revoke consent granted to collect their personal data and if required, make the app delete/ forget the data.

The key point here is that the lenders should capture the economic profile of borrower and assess the consumer’s creditworthiness in an auditable way.

Further, it also talks about mandatory submission of information of loan transactions by digital lenders to Credit Information Companies (CICs) at a shorter interval compared to conventional reporting. This will ensure less dependence on alternate data for financial consumers as more of them would develop formal credit history for themselves.

Unacceptable recovery methods

There have been cases in the past of unacceptable and high-handed recovery methods by lenders.

According to the current RBI’s ‘Guidelines on Fair Practices Code for Lender’, in the matter of recovery of loans, the lenders should not resort to undue harassment such as persistently bothering the borrowers at odd hours and use of muscle power for recovery of loans.

Proposal: Despite this, on the back of rise in concerns over unethical recovery practices, the working paper suggests standardising the code of conduct for recovery, which has to be framed by the proposed SRO.

The SRO is expected to maintain ‘negative’ list of agencies that involved in unreasonable means of recovery and the lender has to make sure periodically that the collecting agency is not mentioned in the list.

Poor grievance redressal

As per the current guidelines, the loan agreement must clearly disclose the options available for the borrower to redress any grievance — be it customer care support, bank/NBFC’s support or the regulator’s redressal mechanism.

A lot of users complain about the poor customer care support in the user reviews for most of these money-lending apps. Once the RBI announced the RBI’s Sachet portal (https://tinyurl.com/rbiportal) for filing complaints, there has been tremendous increase in the number of complaints filed, says the report.

Proposal: The key recommendation in this aspect is that the digital lending apps should name a suitably competent nodal officer to deal with FinTech related issues with customers as well as regulators, SRO, law enforcement agencies, etc. The contact details of the nodal officer would be displayed on the website of the digital lending app.

Also, similar to Banking and NBFC ecosystem, it suggested defined timelines, escalation mechanism for any grievances.

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KreditBee issues over 1 lakh cards within 60 days of launch

Banking & Finance

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Digital lending platform KreditBee has issued over 1 lakh cards within 60 days of its launch.

It aims to expand its portfolio by issuing over 10 lakh ‘KreditBee Cards’ by March 2022, it said in a statement on Monday.

KreditBee has provided these cards to all its customers.

Also see: UPI records 365 crore transactions worth ₹6.54-lakh cr in September

Over 75 per cent of the card customers acquired by the company are from metros and Tier 1 cities like Bengaluru, Mumbai, Hyderabad, Pune and Thane among others.

Almost 70 per cent of these card holders are below the age of 30 years.

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Union Bank MD, BFSI News, ET BFSI

Banking & Finance

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MUMBAI: With digitization gaining pace, close to 50 per cent of retail and MSME loans offered by banks will shift to digital lending platforms over the next two to three years, Union Bank of India’s Managing Director and CEO Rajkiran Rai G said on Thursday.

Rai said digital lending is changing the banking landscape in a big way because of the availability of data and many ecosystem partners collaborating with banks.

“I feel that at least 50 per cent of the loans under retail and MSME segments will move to the digital lending platforms, right from sourcing to documentation level, in two to three years,” Rai said while speaking at the Sibos 2021, an annual banking and finance conference.

He said the digital lending space is gaining traction and banks need to develop products that can deliver services online to customers. Rai said he sees a big revolution in MSME lending going forward.

“The working capital lending to MSME will move from open credit like working capitals and cash credits, to very-targeted lending such as very specific invoice discounting and supply bill discounting,” he said.

Speaking about the entry of fintech in the banking space, he said initially it was thought that fintech will compete with banks, but now the relationship between the two has become more symbiotic.

“Now, fintechs are helping us (banks). They are no longer competitors to us. The digital lending space will be nothing but fintech tie-ups,” he said.

There are many products where fintechs are already working with banks, he added.

Rai believes banks need to continuously invest in technology and upgrade themselves.

He said the management bandwidth in the public sector space, at least on thinking about innovations and digitization, is quite less.

“We have the traditional people who are good in handling technology and managing the core banking system, but they are not in the space of innovation and developing new products,” Rai said.

He said public sector banks need to get new talent from the system who are adept in technology and can bring in innovations.



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‘RBI’s Fair Practices Code to help eradicate digital lenders acting as agents for non-registered NBFCs’

Banking & Finance

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The increasing number of service providers and tie-ups offering easy loans to individuals operating as retailers, small-scale traders, and others necessitated the presence of guidelines.

In the last two decades, the widespread use of technology in the financial services sector has encouraged numerous banks and Non-banking Financial Companies (NBFCs) to work with digital lending platforms, simultaneously allowing them to reach out to a larger consumer base and simplifying their operations. These platforms enable financial institutions to offer an array of hassle-free services, such as lending, account opening, and credit analysis. In the backdrop of these developments, the Reserve Bank of India’s (RBI) last year notification, instructing all institutes engaged in digital-based transactions to adhere to the Fair Practices Code, needs immediate attention.

The notification was issued in light of multiple incidents that revealed highly unethical practices followed by some financial firms. These included exorbitant interest rates on borrowings, non-transparent interest calculation, harsh practices to recover loans, and unauthorised usage of consumer data. The following instructions are a part of the Fair Practices Code by RBI which are binding for all digital lending institutions as well as organizations partnering with them to source borrowers and/or to recover dues:

  • Names of digital lending platforms engaged as agents shall be disclosed on the website of banks/ NBFCs.
  • Digital lending platforms engaged as agents shall be directed to disclose upfront to the customer, the name of the bank/ NBFC on whose behalf they are interacting with him/her.
  • Immediately after sanction, but before the execution of the loan agreement, the sanction letter shall be issued to the borrower on the letterhead of the bank/ NBFC concerned.
  • A copy of the loan agreement enclosed with the various components of the fee structure and/or enclosures quoted in the loan agreement shall be furnished to the borrowers at the time of their loan sanction/disbursement
  • Effective oversight and monitoring shall be ensured over the digital lending platforms engaged by the banks/ NBFCs.
  • Adequate efforts shall be made towards the creation of awareness about the grievance redressal mechanism

Protecting consumer interests has always been the primary motive of the nation’s regulatory bank. The increasing number of service providers and tie-ups offering easy loans to individuals operating as retailers, small-scale traders, and others necessitated the presence of guidelines that streamlines the entire procedure to curb all discrepancies. In addition, it was observed that several digital lending platforms were portraying themselves as lenders without disclosing the names of the bank or NBFC’s that they were partnered with, and such instances of non-disclosure brought to the purview of lending a tremendous amount of ambiguity. Further, it was also noted that customers faced immense trouble while trying to raise grievances due to the lack of a proper structure and transparent system.

Also read: Relief for OYO subsidiary in ‘bankruptcy’ case as NCLAT stays insolvency proceeding

In response to this mismanagement, the RBI issued the “Fair Practices Code “ and declared that outsourcing of any activity by banks or NBFCs does not free them from their obligations. Instead, the responsibility of complying with such regulations rests solely on them and they will be held accountable for any miscarriage of the same. Whether a bank or an NBFC (including those registered to operate on ‘digital-only or both digital and brick-mortar channels of credit delivery) utilises its lending platforms or an outsourced channel, they must adhere to the Fair Practices Code in letter and spirit. Any violation with regards to compliance with the set guidelines will undergo serious scrutiny and review. The RBI also marked the digital delivery in credit intermediation as a welcome development.

These guidelines and regulatory code of conduct will help create an environment reverberating with trust and transparency in the sphere of financial services via digital lending platforms. It will help eradicate digital lenders acting as agents for non-registered NBFCs. With the presence of an ethical structure, consumers can enjoy the benefits of hassle-free loan and interest facilities. Furthermore, these rules act as guardians of crucial customer information. By establishing a crystal clear communication channel, these guidelines help in weeding out all miscommunications between lenders and borrowers concerning the details of their loan, interests, and other additional charges. Apart from the removal of miscommunication, these channels provide a robust grievance resolution system to consumers, wherein they can find detailed solutions for all their problems and queries.

When it comes to borrowing and lending, it is critical that there is a clear, standard, and systematic process in place. In light of these guidelines, several financial service providers have taken the initiative to introduce their internal set of rules to further champion the cause of safeguarding the customer’s interests. For instance, the Fintech Association for Consumer Empowerment (FACE), a non-profit body established by a group of new-age fintech organisations, has its own set of code of conduct for digital lending platforms. The organisation aims to establish a safe ecosystem that entails regular dialogues with industry policymakers such as the RBI, Ministry of Finance, and other planning bodies like Niti Aayog. The growth of such institutions showcases how it is not just the RBI that wants a clean sector; rather, the entire industry is working in unison to make the sphere of tech-enabled financial services a safe and transparent one.

Ranvir Singh is the Co-Founder & MD of Kissht. Views expressed are the author’s own.

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IndiaLends raises $5.1 mn from existing investors ACP Partners, DSG Consumer Partners

Banking & Finance

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Digital lending platform IndiaLends has raised $5.1 million in a funding round led by existing investors ACP Partners and DSG Consumer Partners.

“The Delhi-NCR-based firm will use the funds to expand its technology platform, increase its market footprint and amplify its product offerings to meet the pent-up demand in a post-Covid economic recovery,” it said in a statement on Friday.

The company plans to double disbursements to ₹4,000 crore in the next 18 to 24 months with a focused outreach towards retail consumers living across tier I-II cities and tier III towns.

It has disbursed over ₹2,000 crore in personal loans since launch and has more than 80 lakh customers.

“IndiaLends also intends to extend its outreach to the underserved customers, people who are worthy of getting access to credit but are unfortunately left out owing to the lack of reliable credit history,” it further said.

Gaurav Chopra, founder and CEO of IndiaLends, said the fresh round of financing will help the company usher in the next phase of growth. “This investment is a testament to the fact that the sector is going to witness an upward curve in the days to come,” he said.

Apart from traditional banks and NBFCs, IndiaLends also offers pre-qualified loans from all major fintech and P2P lenders to its customers.

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RBI forms working group to evaluate digital lending

Personal Finance

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The group will 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 Reserve Bank of India (RBI) on Wednesday announced the setting up of a working group (WG) on digital lending, including through online platforms and mobile apps. The committee will be responsible for suggesting specific regulatory measures in the realm of digital lending, among other things.

The move is the latest in the central bank’s attempt to tackle fly-by-night lending apps which have been offering digital loans to underserved customers. Of late, these platforms have come under the regulator’s glare for their adoption of coercive means of loan recovery.

The RBI said that while penetration of digital methods in the financial sector is a welcome development, the benefits and certain downside risks are often interwoven in such endeavours.

“A balanced approach needs to be followed so that the regulatory framework supports innovation while ensuring data security, privacy, confidentiality and consumer protection. Recent spurt and popularity of online lending platforms/ mobile lending apps (‘digital lending’) has raised certain serious concerns which have wider systemic implications,” the regulator said. The group has been asked to submit its report within three months.

The WG will consist of both internal and external members. The internal members are RBI executive director Jayant Kumar Dash, chief general manager (CGM)-in-charge of the department of supervision Ajay Kumar Choudhary, and CGMs P Vasudevan and Manoranjan Mishra. The external members are Vikram Mehta, co-founder of peer-to-peer (P2P) lending platform Monexo Fintech and Rahul Sasi, cybersecurity expert and founder of digital risk monitoring firm CloudSEK.

The group will 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.

It will evaluate digital lending activities and assess the penetration and standards of outsourced digital lending activities in RBI-regulated entities. It will also be tasked with identifying risks posed by unregulated digital lending to financial stability, regulated entities and consumers and suggest regulatory changes, if any, to promote the orderly growth of digital lending.

Further, the WG will be expected to recommend measures, if any, for expansion of specific regulatory or statutory perimeters and suggest the role of various regulatory and government agencies. It shall also recommend a fair practices code for digital lending players, insourced or outsourced, and suggest measures for enhanced consumer protection. In addition, the recommendation of measures for robust data governance, data privacy and data security standards for deployment of digital lending services will come under the group’s purview.

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