Digital Lending: The advancement of technology has caused a paradigm shift in all facets of our life, and financial services are no different. Technology has significantly impacted the financial services industry, and this trend will continue. Financial services are currently undergoing a digital transition, and to increase their efficiency, we must do away with all bottlenecks and conventional restrictions.
Digital lending focuses on the lending process using online platforms and mobile apps while utilising technology for credit scoring and authentication. Over the years, there has been a notable expansion in the digital lending business in India. By FY23, it is anticipated that the value of digital loans would reach USD 350 billion. The Reserve Bank of India (RBI) has established A framework to control online lending. The new rules are based on suggestions made by a working group on “Digital Lending, including Lending through Online Platforms and Mobile Apps,” which was formed in January 2021.
Lenders now have access to the solid client base that banks have built up over the past ten years, especially with the August 2015 launch of the Pradhan Mantri Jan Dhan Yojana (PMJDY) plan.
Digital Lenders are categorised into three groups as follows
● Lenders that are regulated by RBI and can carry out the lending business
● Lenders that may conduct lending under other statutory or regulatory rules but are not controlled by the RBI
● Lenders who are outside of any regulatory requirements
RBI has planned certain guidelines to safeguard borrowers from any unethical practices. The guidelines, while promoting innovation in digital lending, aim to ensure that recovery agents and their unethical tactics don’t become a deterring factor for the borrowers..
These Guidelines are as follows
● The norms prohibit any automatic increase in credit limits without the borrowers’ explicit consent
● Guidelines reduce the interference of LSPs (Loan Service Providers) and mandate that all loans are disbursed and repaid between borrowers’ bank accounts and RBI-regulated entities.
● To the borrower, the lender must uniformly disclose the annual percentage rate (APR) and all other fees to the borrower.
● The bank, not the borrower, will pay any fees owed to LSPs (Loan Service Providers) during the credit intermediation process.
● There may be no automatic increase in the credit limit without the borrower’s express permission.
● Digital lending apps must only gather data that is necessary, with the borrower’s prior consent, and that can be audited as needed.
● To handle complaints relating to FinTech and digital lending, REs must make sure that both they and the LSPs (Loan Service providers) they have hired have access to an appropriate nodal grievance redressal officer. This grievance would also handle the complaints against their respective DLAs redressed officer.
● Before signing the loan contract, the borrower must get the key fact Sheet (KFS) which must include the APR (Annual percentage rate), which is the total cost of all digital loans.
● Digital lenders should actively develop a code of conduct that highlights the values of honesty, openness, and consumer protection, and it should include specific guidelines for disclosure and complaint resolution.
Significance of digital lending:
Digital Lending easily captures the applicant’s information. A digital lending platform allows consumers to originate loan applications from anywhere, allowing banks to do away with any geographic restrictions. Applicants only need to submit identity documents onto their mobile app after filling out their personal information and choosing the loan products they want.
● Reduce Informal borrowing: By making the borrowing procedure simpler, it aids in lowering informal borrowing.
● Meets Credit Needs: Specifically, in India’s microenterprise and low-income consumer segments, financial inclusion aids in addressing the country’s enormous unmet credit need.
● Time-Saving: It cuts down on the time needed to process loan applications locally.
● Faster Decision Making: Digital lending aids in a faster decision-making process as everything is streamlined and all the relevant checks are happening in due time
● Less Prone to errors: With digital lending, risk limits and loan terms are checked by using digital tools, which reduces the chance of errors affecting the fundamental resolution of a customer complaint and increases the probability that the relevant details will be error-free. As a result, digital lending has a better solution to addressing customer concerns.
● Improves Consistency: Digital lending platforms replace human decisions with AI/ML decision rules. This technology ensures that the process is always consistent and error-free. Pre-configured workflows and automatic decision rules make sure that the appropriate risk limits and loan terms assess the applicants. As a result, no human bias or error is involved. The platforms just adheres to pre-configured rule sets to ensure the consistency of the loan origination processes and credit policies.