India’s central bank tightens rules on digital lending after complaints

Bloomberg

India’s central bank released guidelines for digital lending, targeted at bringing transparency and data protection to the business after complaints started mounting over unfair recovery practices, with many players capitalizing on borrowers’ lack of financial literacy.
The Reserve Bank of India (RBI released the guidelines on Wednesday, which direct operators to display all inclusive costs of the digital loan as an annual percentage rate upfront and bring periodic review of the conduct of lending service providers engaging in recovery.
The rules also prohibit companies from automatically increasing credit limits without the explicit consent of borrowers and also direct these apps to promote user awareness by educating the borrower — many of whom can be first timers — about the features of the product being offered.
“The guidelines are tilted more toward control than innovation,” said Vivek Belgavi, Fintech and Alliances leader at PricewaterhouseCoopers LLP in India, adding that there would be short-term pain for regulated entities and lending service providers. “In the long term, it would be beneficial for the system as a whole and the regulator should look at more enabling data infrastructure for the industry.”
With these guidelines, the country joins others in the region in trying to regulate the fast-booming sector, which has the potential to bridge the credit gap through its small-ticket and quick loans. Digital lending in India alone is projected to reach $350 billion by 2023. However, harsh recovery tactics drew calls for greater regulation. Non-profits like SaveThem India Foundation had connected at least 17 suicides to these methods over the last year.
The RBI also directed the app operators to desist from accessing mobile phone resources like media and contact lists, after mounting reports outlining harassment based on the misuse of data by recovery agents.
“Keep in mind that most of these consumers that are out there taking the loans aren’t reading the RBI guidelines,” said Sachin Taparia, the Founder of LocalCircles. “So only when they see some action on the ground is when they will start to show some confidence.”
The RBI raised the prospect in November of new rules for digital lenders. A panel set up by the bank found that more than half of about 1,100 digital loan providers were operating illegally. Millions of Indians rely on the apps, and there is often no clear-cut way for borrowers to discern the legal from the shoddy.