As per the statement by Finance Minister Nirmala Sitharaman on Sep 29, 2021, saying that India has the highest fintech adoption rate of 87 per cent as opposed to the global average rate of 64 per cent, shows that India is a prime destination for digital payments and activities.
This rapid adoption rate has motivated many players including traditional institutions ranging from banks to NBFCs who are eager to grab the opportunity and capitalise on the fintech wave that has permeated almost all sectors of the Indian economy and has the potential to exponentially grow in the near future.
This also resulted in a sudden spike in the growth of the digital lending ecosystem, especially since the pandemic started. As per the RBI working group report, In the year 2021 alone, Rs 1.42 lakh crore worth of loans were disbursed digitally. Digital lending has become so popular that 53.1% of all loans given out by NBFCs were digital.
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However, this sudden and rapid growth in the trend of digital lending has its own vulnerabilities which need attention.
The sudden rise in digital lending-borrowing practice has resulted in the growth of predatory lenders. As of December 2021, there were about 600 such predatory illegal lending apps in India, operating across multiple application stores.
On November 18, 2021, The Reserve Bank of India (RBI) said it had received over 2,562 complaints against these lending apps. These predatory lenders give loans at unreasonable interest rates failing which they harass and criminally intimidate the borrowers.
These predatory lenders are not only hampering the image of the digital lending industry but also contributing to the trust deficit among the borrowers, hindering the growth of the industry as a whole.
The Self-Regulatory Organisation (SRO): A Probable Solution
In November 2021, the RBI released a working group report which highlighted the need for an SRO in the industry. SROs are the ideal solution to the challenges faced by the digital lending industry as they will not only ensure that the bad players are weeded out but also drive innovative, sustainable and responsible growth in the sector.
An SRO in the digital lending industry can curtail the growth of rogue lenders by (i) promoting ethical behaviour among digital lenders (ii) building a robust infrastructure for ethical lending and (iii) creating dynamic regulatory strategies.
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Promoting ethical behaviour: An SRO formed via an alliance of like-minded industry players can create a robust and secure ecosystem based on uniformity of rules and patterns of conduct. Thus an SRO can ensure the conduct of business in accordance with the codified rules, thereby setting some degree of ethical standards.
This will result in shrinking the dark market and will encourage the lenders to participate without any prejudice or fear. Moreover, since the SROs have the moral obligation to uphold the good of the industry, they would also have the power to punish players who do not abide by the code, setting in place disincentives for unethical behaviour.
Building a secure, robust infrastructure: The SRO will also ensure the building of a robust tech infrastructure to ensure a safe, credible and secure digital lending ecosystem. This could be done by acquiring and promoting ethical data mining technology among member companies and by building a tracking mechanism to trace predatory lenders floating in the ecosystem.
Creating dynamic regulatory strategies: The SROs can be very instrumental in adapting to the changing regulatory landscape due to their regular interactions with the RBI, and at the same time can be very adept in adapting to changing technologies.
Thus, the SROs can effectively juxtapose these two spheres to create dynamic regulatory strategies to combat rogue elements in the ever-changing digital lending market.
The benefits provided by legitimate lending apps in our country are being reaped by millions however, frequent misinformation and the entry of illegitimate apps have made the overall lending industry suffer from pangs of distrust when compared to the trust consumers place in legacy systems.
The formation of an SRO in the digital lending industry will help rebuild the trust and dependency of the consumers in the system. The goal is to change how lending apps are perceived today and shed their reputation as the second choice or an "after-thought" among borrowers. I strongly believe we're treading on the right path and hopefully, we'll see RBI's decision soon on choosing an SRO.
(The author is Chairman of the Board, FACE.)
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