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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