RBI report: Lending is trust. Digital, a layer

Consumers’ faith in a system is based on their comfort that the regulator has adequate measures to protect them. Here, RBI has shown fine mettle

By Srinath Sridharan
The Fourth Industrial Revolution brought in changes in the way we live, work and relate to one another; more importantly, the way we relate to physical living, way of life, digital and technological changes. It is redesigning conduct expectations, behavioural traits and regulations of markets, economy, trade and society (METS).

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The key structural development of JAM (Jan Dhan-Aadhaar-Mobile) trinity catalysed the way digital adoption grew and consequently the ability to increase finance consumption across Indian consumer segments. In parallel, the rapid growth of fintech companies made credit accessible to a wider demographic. Of the 400 million working population aged 18-33, credit penetration is around 8%. Leveraging Indian fintech adoption rate of 87% (as compared to the global average of about 64%), regulated digital lending can be a larger and effective financial inclusion medium.

Pace in this space

Regulatory pace to keep up with technological changes will be a tough ask; yet it’s needed for blending innovation, industry growth, responsible consumption impetus, and consumer protection. In the digital finance world, the speed of consumers’ adoption would allow finance entities to go from ‘too small to bother about’ to ‘too unwieldy to influence’ in a short period of time. There might be a need to bring in frequent regulatory pegs to close any arbitrages that keep unfolding; that would test the speed of regulatory decision-making and it would not afford any luxury of time for developing policies or rules.

As more interconnectedness is seen in our markets, we will need to utilise technology even for real-time regulatory supervision. With proliferation of lending entities (banks and non-banks) in general, and particularly the pure-play digital lending entities, technological framework is needed to maintain compliance onus and to track down regulatory predators proactively as a preventive measure instead of policing effort later.

Digital lending draft rules

While the industry anticipated far lesser time for this report, the ‘Report of the Working Group on Digital Lending including Lending through Online Platforms and Mobile Apps’ comes at a time when the industry is at an inflexion point. The recommendations rightly want to ensure that customers borrow from only verified mediums, and fintech companies that fall under the purview of these norms include credit and buy-now-pay-later (BNPL) players. The suggestions include that balance-sheet lending through these apps should be restricted to RBI-regulated entities and that all loan servicing 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.
Setting up nodal agencies to run digital lending applications through stringent verification processes and maintaining a register of verified apps, while simultaneously restricting a digital lender’s balance-sheet lending through only regulated and authorised entities, would assist in eliminating predatory lenders from the field.
Having a public register of verified apps to be maintained will need a different approach when the number of apps increases manifold and expecting consumers to cross-verify won’t help the cause. Instead, can the regulator have a way to get the various app-stores to allow only approved digital apps/entities to be ‘on the store’? At some time, the influence to regulate tech-fin giants would be tested with this logic, as it would need collaboration across various financial regulators and the ministries concerned.

Thinking of tech-fin

RBI oversees banks and non-banks with regularity and a fair amount of practised supervisory ease. Looking at the recent experience in consumer challenges faced due to illegal lending apps, almost all lending entities linked to those apps were sub-scale non-banks, which probably escaped the regulatory scanner due to their minuscule balance sheets. This argues for digital real-time supervision of all lending entities, irrespective of size, scale and licence classification.
At some time soon, we should put an end to the concept of licence-hoarding in financial services. This can be brought about by asking all lending entities to bring in a threshold capital to be locked-in, and to start using their balance sheets for business operations. Those licences not used for lending activities and just as parking vehicles can be weeded out within a time-frame.
But where tech-fins are concerned, the challenge lies in the fact that they are very large, operate boundary-less and with frenzied speed, further exacerbated by their capacity to infuse huge equity capital. Global tech giants are already into the financial services sector, influencing policy discourse through their products and/or communication platforms.
We also need to think of stronger cybersecurity as well as data protection norms. In a country where keypad literacy is more than literacy, we need to be mindful in having these safeguards proactively. These can be achieved with institutional competencies of strong self-regulatory organisations (SROs), under the guidelines of RBI.

Shaping SROs

SROs, by their very design, must be agile, consumer-centric bodies. SRO leaders have to bring understanding of finance, digital & technology sectors, consumer grievance redressal, risk management, and ability to act tough on member-entities if found derelict. The market—while it would want to bring in a different set of talented individuals—might fear that they would be nudged to the tick-mark approach of dipping into old boys network and/or retired bankers. Hopefully, in this day and age, we shall see experienced industry leaders who have the capability, energy and experience to join SRO roles, to play a collaborative role in this important sectoral journey.

As the ears-on-the-ground for the regulator, SROs should collate industry trends, have a consumer mood-o-meter, and to act as the industry’s conscious keeper. As an SRO for primarily digital lending entities, it should be able to offer stability, dynamically evolving framework for responsible lending, and to guide the industry to deliver financial inclusion.

The digital lending market in India is evolving fast, and with the Fourth Industrial Revolution it is a matter of time for a shift from digital-too to digital-first to digital-only. It could take a few years or many. The sooner the updated regulations are put in place, the better and efficient the market can become, in facilitating higher credit growth. The RBI working group report is a positive first step in this direction.

Consumers’ faith in a system is based on their comfort that the regulator has adequate measures to protect them. In that endeavour, RBI has shown fine mettle. In the digital finance era, this will be sharpened further, with global interconnectedness pushing the benchmarks higher. That’s the institutional strength in RBI.

The author is a corporate advisor and independent markets commentator
@ssmumbai