RBI panel suggests separate law to prevent illegal digital lending via online platforms & mobile apps

Seeking to safeguard the interest of customers, a Reserve Bank working group has suggested the enactment of separate legislation to prevent illegal digital lending through apps.

The other suggestions of the working group include subjecting the digital lending apps to a verification process by a nodal agency and establishing a Self-Regulatory Organisation (SRO) covering the participants in the digital lending ecosystem.

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"The thrust of the report has been on enhancing customer protection and making the digital lending ecosystem safe and sound while encouraging innovation," RBI said in a release.

The RBI had in January 2021 constituted the working group under the chairmanship of Executive Director Jayant Kumar Dash on digital lending, including lending through online platforms and mobile apps.

The working group was set up in the backdrop of business conduct and customer protection concerns arising out of the spurt in digital lending activities.

The stakeholders can send their comments on the report to the RBI by December 31.

Among other things, the group suggested development of certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions.

The loans, it added, should be disbursed directly into the bank accounts of borrowers and serviced only through bank accounts of the digital lenders.

Data collection with prior and explicit consent of borrowers should have verifiable audit trails and should be stored in servers located in India.

It is further stipulated that use of unsolicited commercial communications for digital loans should be governed by a Code of Conduct to be put in place by the proposed SRO.

Algorithmic features used in digital lending should be documented to ensure necessary transparency, the report said.

The lending companies should also be required to follow standardised code of conduct for recovery to be framed by the proposed SRO in consultation with RBI.

The SRO should also be required to maintain a 'negative list' of lending service providers.

Each digital lender should be required to provide a key fact statement in a standardised format including the Annual Percentage Rate, it said.

The Reserve Bank had constituted the Working Group (WG) on digital lending on January 13, 2021 to study all aspects of digital lending activities in the regulated financial sector as well as by unregulated players so that an appropriate regulatory approach can be put in place.

The report highlighted that lending through digital mode relative to physical mode is still at a nascent stage in case of banks (Rs 1.12 lakh crore via digital mode vis-a-vis Rs 53.08 lakh crore via physical mode).