End or technology? RBI wants to draw a line


The recommendations of the Reserve Bank of India’s internal task force on digital lending seek to draw a line between finance and technology, pushing much of that credit onto the balance sheets of regulated entities.

While this may impact the pace of digital lending growth, it will help the segment grow more manageable, industry analysts and executives have said.

Recommendations released on November 18 say digital lending should be done through verified apps. It also recommended that balance sheet loans be made only through regulated entities and that risk sharing with lending service providers be limited. The group also suggested that the buy-now credit be treated as a balance sheet loan.

The proposals appear to be largely constructive for the digital lending space, said Anand Dama, analyst at Emkay Global Financial Services. “That said, the introduction of regulations could moderate the growth rate of Digi loans,” Dama added.

The task force recommended ending a popular loan structure called the First Default Guarantee (FLDG).

Under this, a loan service provider (LSP) offers a first loss guarantee up to a predetermined percentage of the loans it generates.

“From the LSP’s perspective, FLDG’s offering acts as a demonstration of its underwriting skills while from the lender’s perspective, it provides the skin of the platform in the business. For all practical purposes, the credit risk is borne by the LSP without having to maintain any capital regulations, ”the task force said in its report.

According to Akshay Mehrotra, co-founder and CEO of EarlySalary, a payday lender registered as a non-bank lender, by creating these synthetic structures, tech companies are masquerading as lenders or financial institutions. “It’s important to understand who the lender is and who the loan service provider is,” he said.

Gaurav Chopra, co-founder of IndiaLends, agrees.

The entire due diligence process has been bypassed by these apps through the FLDG route, Chopra said, explaining that banks and NBFCs have to adhere to strict regulatory rules and are subject to oversight. “While it’s meant to be a cash flow / liquidity solution, it also helps businesses share risk. “

Ramaswamy Iyer, founder and CEO of Vayana Network, a trade finance company, said these structures allow apps to bypass the need for a loan license. Only NBFCs and banks should lend, while FinTech companies are supposed to be middlemen that connect the borrower and the lender, he said.

The task force also suggested, although not recommended, that buy-now credit only be granted on the balance sheet. All of these loans should be reported to the credit bureaus, the committee suggested. Until now, while registered lenders offering BNPL loans reported them to the credit bureaus, others did not.

BNPL’s marketing presents it as a convenience, but it’s just another way to extend credit, said Chopra of India Lends. “While a small purchase may not seem like much, it has the potential to uproot your finances at the end of the month.”

As such, the task force can be justified in suggesting that these loans be tagged as credit and reported to the bureaus.

“BNPL has become a buzzword in the financial industry and is poised to experience explosive growth, with co-payments entering the ring, outside of private banks / NBFCs,” Dama said. The product, he said, is aimed primarily at cardless and credit-deprived borrowers, exposing them to debt traps and predatory pricing.

The task force also recommended some basic technology standards as a prerequisite for offering digital lending solutions. He said data collection can only be done with the prior and explicit consent of borrowers with verifiable audit trails. Algorithmic features used in digital lending should be documented to provide the necessary transparency.

“The new suggestions, along with upcoming data protection laws, aim to create a consent-based mechanism that shows the user exactly what will be collected and how it will be used,” said Anurag Jain, founder and leader. director at KredX, a working capital lender. “RBI has cracked down on the payments industry for data localization before, we can expect the same to happen here as well. “

According to a Kotak Institutional Equities report dated November 22, the scope of permissions requested by payment and digital finance apps differs.

Paytm has maximum access to the user’s phone as it searches for 44 different permission types. This includes requests such as “change system settings”, “uninstall shortcuts” and even “add or remove accounts”. Bajaj Finserv and PhonePe take 34 permissions each. BNPL-centric products like Cred and ZestMoney require authorization for 13 to 22 types of access.

Some of these apps have deep access to all data on a user’s phone, and in many cases recovery agents have abused that access, Jain said.

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