RBI’s resources may be stretched in monitoring these apps. Self regulatory bodies may be a

better option

In September 2022, the Union Finance Minister had expressed concern on the increasing instances of illegal Loan Apps offering loans/micro credits, especially to people from low-income groups at exorbitantly high interest rates, and predatory recovery practices. She asked RBI to “prepare a Whitelist of all the legal apps” and “to review/cancel dormant NBFCs to avoid their misuse.”

In a press conference following the MPC meeting in February, the RBI Governor indicated that digital lending apps are not regulated by the RBI.

However, the RBI had in September 2022 unveiled its guidelines on digital lending based on the recommendations of the Working Group on Digital Lending submitted in August 2022. The RBI also forwarded a list of such apps collected from non-banking finance companies (NBFCs) to theCentre.

Just as fintechs began to rebuild their business based on RBI guidelines, the Ministry of Electronics and Information Technology (MeitY) in February issued emergency orders restricting 94 loan apps from app stores. Some apps hosted by regulated entities (REs) of RBI were part of this order as well.

This regulatory overlap between the RBI and the MeitY has caused confusion in the minds of the fintech players.

An app a day

Apps offering instant loans gained traction during the Covid pandemic when people had to resort to distress borrowing.

According to the RBI’s own estimate, “there were approximately 1,100 lending apps available for Indian Android users” and as many as 600 illegal loan apps as of February 2021.

Today mobile apps have become an important part of our lives. These apps not only connect people with businesses but are also a source of information and entertainment.

A loan app serves as a digital branch for customer acquisition, loan origination and loan servicing. The app connects the user to a host server which takes the loan sanctioning process further through digital and other means that results in approval or rejection of the loan.

These apps are generally operated outside the ambiguity of law. The illegal practices of some of the lending apps, mainly of Chinese origin, had mushroomed during the pandemic.

They offered credit online at exorbitantly high interest rates, and borrowers were often subjected to coercive recovery practices.

This made the RBI issue the guidelines and later the Finance Minister asking RBI to ‘whitelist the apps’ and bring some order to the lending app scenario.

A ‘whitelist’ of loan apps on RBI’s website is expected to assure the loan seekers th at they are dealing with an entity regulated by the central bank, providing them with some protection.

This could be on the lines of an ‘alert list’ and an approved list of web portals / apps where forex can be bought and sold hosted on the RBI website under the Electronic Trading Platforms (Reserve Bank) Directions 2018. The lists were first hosted by the RBI last September and have been updated in February this year. Further, when a loan app is included in the ‘white list’, it would imply that the regulator has reasonably satisfied itself about the software and its various functionalities, such as the rate of interest, annual percentage rate (APR), origination/processing fee, penal interest payable, pre-payment charges, recovery mechanism etc.

An app on the RBI whitelist would imply that it is broadly in conformity with regulatory guidelines on digital lending.

By undertaking to whitelist the loan applications, the regulator has established legally enforceable responsibilities. While granting licenses/permits to banking and other entities, does RBI not assume responsibility to directly compensate the consumers of these entities for their commissions and omissions?

The Banking Ombudsman Scheme and deposit insurance schemes are instances of that. But does the RBI have the sufficient bandwidth and resources to regulate these loan apps, that form only a small percentage of total advances of the banking system?

So instead of a whitelist, the RBI could have a ‘registry’ of fintech-digital lenders along with their apps, with appropriate caveats.

For blacklisting the lending apps of a regulated entity, the RBI would have to give due notice to the alleged wrongdoer/violator. Post notice, the principle of ‘Jus Natural’ will also have to be followed. Moreover, a ‘white list’ is not a static post. It will need upgrade from time to time impinging on RBI’s resources. The question is if the RBI cannot do it, who should do it?

SROs, the answer ?

Over the years, the RBI has actively encouraged setting up of self-regulatory organizations (SROs) for various categories of financial institutions — FIDC for NBFCs, MFIN and Sa-Dhan for MFIs and so on. SROs are encouraged with a view to having wider participation in designing regulatory policies.

“With the guidance received from the regulator, they help instil professional market conduct among their members in order to ensure customer/investor protection,” avers M. Rajeswar Rao, Deputy Governor of RBI. The RBI Working Group on Digital Lending had also recommended SROs exclusively for digital lenders.

“An SRO in the digital lending industry can curtail growth of rogue lenders by (i) promoting ethical behavior among digital lenders, (ii) building a robust infrastructure for ethical lending and (iii) creating dynamic regulatory strategies,” says Ram Rastogi, a payment and fintech industry veteran.

There are currently two industry associations. The RBI could use moral suasion to amalgamate these two forums and entrust the responsibility of an SRO for the digital lending space, to the merged entity or authorize them to act in a coordinated manner.

This body could be authorized to maintain a whitelist of digital lending apps on its website and keep it updated.

The writer is a former central banker. Views expressed are personal

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