GS Paper III

News Excerpt: 

With predatory digital lending practices drawing attention, it’s crucial to look at the funding and regulatory environment within which the sector operates.

About Digital Lending Ecosystem:

Digital lending is a mobile and web-based application with a user interface that facilitates digital lending services, (for example, the mobile banking app of a bank that enables a user to avail of a loan through their phone).  Digital Lending companies are: 

• The digital lending platforms ( LendingKart, Zerodha,Paytm, Razorpay, Simple, and Policybazaar.com) evaluate the applicant's paperwork and, within a few hours or days, deliver a small-ticket loan with a term of 3-6 months. 
• The digital lending market was worth $270 billion in 2022 and is expected to reach $350 billion by the end of 2023 to $1.3 trillion in 2030, according to the recent  ‘State Of Indian Fintech Ecosystem Q3 2022’ Report.
• According to the ‘FinTech Lending Trends FY22-23’ report by FACE-Equifax, Tier-3 cities constitute 40 per cent of the market, and 80 per cent of the borrowers are under the age of 40.
• Digital loans comprised about 8 percent of unsecured personal loans in FY23, up from about 5 per cent in FY20.
• Credit saw a surge during the COVID-19 pandemic, with RBI data revealing that credit card payments increased from INR 6,30,414 crore in the fiscal year (FY) 2020-21 to INR 10,49,065 crore as of September FY23.

Factors Contributing to India’s Rise in Digital Lending:

Problems and Initiatives Regarding Digital Lending:

The growth in digital lending has been accompanied by a fair share of complaints, especially against illegal digital lending apps. 

• Underserved households and MSMEs with limited financial literacy may be lured into taking up unsuitable and unaffordable digital credits, leading to over-indebtedness and bankruptcy.
• There is an increasing number of unlicensed digital lending platforms and mobile applications, with issues such as:
  • Exorbitant interest rates and other hidden fees.
  • Undesirable and overbearing recovery approaches.
  • MIsuse agreements to gain access to data on borrowers' mobile phones.

In response, the Reserve Bank of India constituted a Working Group on Digital Lending and, that  recommended, the following guidelines on digital lending:

• Regulated entities (REs) such as banks and non-banking financial companies (NBFCs) can enter into outsourcing relationships with lending apps. However, the responsibility of lending remains with the REs.
• The RBI also allowed First Loss Default Guarantee (FLDG) for digital lending fintechs.
• Infrastructure development initiatives, such as eKYC, Open Network for Digital Commerce, Open Credit Enablement Network, etc., and policy-led initiatives such as First Loss Default Guarantee (FLDG) program approval are being targeted towards the promotion of digital lending.
  

• • If a customer defaults on a loan up to a certain threshold of the loan portfolio, the fintech takes the first hit and compensates the lender (bank or NBFC). With this, the RBI ensured that banks did not face the brunt of a potential spike in loan defaults.
• The RBI has also ordered that digital lending platforms used on behalf of banks and NBFCs reveal the identity of the bank(s) or NBFC(s) to customers upfront.

Way Forward: 

India’s Borrowing "Future" is expected to grow in the next few years. With the next generation adopting current credit schemes and payment convenience, it will be soon that the digital lending industry will expand to more than 500 billion USD.

• India is on the verge of a Digital Lending Revolution, and only responsible lending can ensure that the benefits of this revolution are realised.
• Poor collection practices may be used primarily by lenders that have mis-sold loan products to financially inexperienced consumers, resulting in high delinquencies. Thus,'approved' credit recovery procedures should be followed.
• Financial regulations along with Improving financial knowledge and empowering people to distinguish between good and bad lenders will be necessary to prevent unethical sales practices.