Ban Looms for Unchecked Digital Platforms in Lending.

New Delhi: The Indian government is contemplating legislation to prohibit digital lending by unregulated entities, aiming to curb the rise of illegal online lending platforms and mobile apps. The move seeks to safeguard individuals who, enticed by the ease of borrowing, often face exorbitant interest rates and unethical recovery practices. These practices have tragically led to some suicides. Although the Reserve Bank of India (RBI) has established a regulatory framework for lenders under its purview, unregulated lending apps—especially those hosted overseas—continue to operate without oversight.

While the RBI’s regulations cover various financial entities, including commercial banks, cooperative banks, non-banking financial companies (NBFCs), and housing finance companies (HFCs), unregulated lending apps operate outside these boundaries. Digital lending, characterized by remote and automated processes utilizing seamless digital technologies, lacks adequate regulatory checks.

“A legislation is needed to effectively ban unregulated digital lending activities of unauthorised entities. It is a matter under consideration,” one of the two said. There are several cases of harassment and suicide because of unauthorised lending apps, often having links with China, a second official said. It was reported on November 16 that two persons from Assam were arrested for abetment of suicide of a 34-year-old lab technician from Diva in connection with an online loan. Quoting a BBC investigation on October 11, Also reported at least five-dozen similar cases because of instant loan apps, mostly having links to China.

To address this issue, the government has already banned numerous unauthorized apps based on recommendations from the home ministry. The government has also urged multinational app store hosts to remove personal loan apps targeting Indians without proper registration with the central bank or government. Consequently, the number of lending apps on Google Playstore has significantly reduced.

In addition to banning unregulated entities, the proposed legislation may empower the central bank to regulate third-party service providers, such as fintech firms hired by banks and NBFCs. The RBI’s working group on digital lending, in a report from November 18, 2021, recommended the establishment of a Digital Trust Agency (DIGITA) to verify digital lending apps before public distribution through app stores. The government is expected to operationalize DIGITA promptly.

According to the RBI’s working group report, the volume of disbursement through digital mode for sampled entities surged from ₹11,671 crore in 2017 to ₹1,41,821 crore in 2020, marking over a 12-fold growth in three years. Concerns about indiscriminate lending of unsecured loans prompted the RBI to tighten norms for consumer credit, particularly for NBFCs and credit card issuers, on November 16. RBI Governor Shaktikanta Das had earlier flagged the high growth in certain components of consumer credit, advising financial institutions to strengthen their internal surveillance mechanisms. While the RBI has specific rules for regulated lending entities, consumers remain vulnerable due to the lack of norms for unregulated digital lending apps.